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How is Term Insurance Premium Calculated?

Rohit Sapra Rohit Sapra 30 October 2017

If you've been wondering why the premium amount has changed from the last time you intended to buy a term insurance plan, then this read is for you.

Factors that determine your term insurance premium

It's not unusual to have a strong desire to safeguard your family from financial perils. And if you're the sole earning member of the family, it becomes all the more important to protect your family's financial future, in case you're not around. A term insurance plan is the perfect way to go about it!

But wait, do you know how much premium you would need to pay to in order to buy a term insurance plan?

Let's dive deeper to find the answer for- "How term insurance premium is calculated by the insurer for your favorite term plan”.

Premiums are calculated based on a simple formula i.e. premium rate multiplied by the cover amount chosen.

Term Insurance premiums rates are determined by statistics and mathematical calculations done by the underwriting department of the insurance company. When calculating the term insurance premium, risk plays a vital role. Risk reflects the likelihood of the insured person making a claim. The lower the risk that a claim would arise from the insured event, the lower the premium will generally be.

So, let’s see how the insurers determine the premium rate based on the risk involved when you apply for a term insurance plan:

  • Age: Age is the first and most dominating factor of your premium amount. The older you are when you apply for a term insurance plan, the higher your premium will be. This is because of higher risk you pose to insurers due to higher age your health will be declining and chances of occurrence of the insured events is much higher. As the cost of premiums tends to increase with age, getting a term insurance plan as soon as possible is always suggested.

  • Gender: Studies have shown that women on an average live five years longer than men. Hence, the insurers feel that insuring the life of a woman is less risky than insuring a man. For this reason, premiums charged for men are comparatively more than women.

  • Occupation: The occupation you are involved in also plays an important part in determining your premium amount. There are some occupations that are considered by insurers as high risk than others for e.g. soldiers, pilots, fishermen, miners, off-shore oil or gas industry workers, etc. are considered more dangerous occupations that people working in offices with a desk job, shop workers, teachers, etc. Hence the people working in safer environments pay lower premiums than others.

  • Geographical Location: The place of your stay also plays a vital role in determining how much you would be charged for your term plan. If you are located in a place which is more disaster prone or faces natural calamities like earthquakes, tsunami, hurricane very often, you would be paying a higher premium as the likelihood of you getting affected with it are higher than people living in other locations.

  • Height and Weight: Insurers take your height and weight into consideration to determine whether you have a healthy body mass index. If you're overweight, then you're more likely to suffer from weight-related medical conditions, such as breathing problems, heart disease or diabetes. This in turn affects the premium charged to you.

  • Life Styles Habits:

    • Smoking or Tobacco Use: It is proven fact that people who do not consume tobacco products live a longer and healthier life than those who do. This is because smokers are prone to contracting life-threatening diseases such as lung cancer, throat cancer, etc. therefore they are required to pay higher premiums. Generally, if you've have consumed tobacco products in any form in the last 12 months you'll be considered a smoker. Insurers generally don't distinguish the people applying based on how many cigarettes they smoke - if you have a habit of smoking 20 sticks-a-day or even one per day, you'll be considered a smoker.

    • Alcohol Consumption: Too much drinking - that is, drinking more than the recommended amount of alcohol consumption regularly can lead to alcohol-related health problems, such as liver disease and affect your life span. This is seen as a major reason by the insurers for charging higher premiums.

  • Medical History: Your past medical history also has an effect on your premium. If in the past you have suffered any sever illnesses or are currently suffering from one, it will raise the premium that you are required to pay. Life-threatening illnesses or disease like type one diabetes will raise the premium required to be paid by you. If you have previously suffered from cancer most insurers won't offer you the plan at all however, if you have survived for a period of say at least 5 years without any signs of relapse of the disease they might consider your case.

  • Family Medical History: If any of your immediate family members like father, mother, brother, sisters have been or had contracted with life threatening diseases at an early age, their medical condition will affect your premium amount. The reason being you may also get affected with the same at a later stage in life.

  • Sports and Hobbies: If you are adventure sport junkie or have high-risk hobbies like motorsports, skiing, rock climbing, sky diving, or horse riding – you are more likely to meet an accident than other people. Involvement in such dangerous hobbies or adventure sports can affect your premium negatively.

There are also other things like marital status, no. of dependents, travel history, foreign travel, financial status, the plan you have opted for, period of coverage you have chosen, any additional riders you have opted for. Each and every factor associated with your life and decision you have made can have an impact on the amount of premium you are required to pay.

Most importantly remember to disclose all health-related information at the time of buying a term insurance plan. If you hide any material facts or neglect to disclose the same, it could lead to your claim getting rejected.

How is term insurance premium calculated?

Rohit Sapra
Written by Rohit Sapra
Rohit Sapra, a licentiate, and currently an SME, is a seasoned insurance professional with previous work experience from Kotak and Birla Sun Life Insurance.