Why Your Life Insurance Premium Varies Across Insurers

Life is uncertain, and an unforeseen event may result in your sudden absence. Your family may be left with outstanding liabilities like a home loan or may lose their income if you are the sole earning member.

Life insurance is an excellent way to prevent your family from a financial crisis in your absence. It is a contractual agreement between you and the insurer. According to this agreement, the insurance company will pay the benefits to your nominees in case of an unfortunate circumstance occurring during the policy period.

What is an insurance premium?

You understand what is life insurance; however, do you know the meaning of premium? It is the amount you pay to the insurance company to provide life coverage and other benefits under the policy. You must pay the premium when you buy the policy and later at periodic intervals to ensure, the coverage continues for the entire duration. Insurers offer different premium payment alternatives, which include monthly, quarterly, bi-annually, and yearly. 

Factors that determine the life insurance premium

Primarily, insurance companies use four factors to calculate the premium. Therefore, you may find that different insurers charge a varying premium for the same sum assured (SA). These aspects include:


  • Underwriting procedure


The underwriting procedure is used to calculate the premium based on the potential risk. It refers to the chance that the insurance company assumes by agreeing to provide the life cover. As the perceived risk is subjective, it varies among insurers, which is one factor why different companies may not charge the same premium.

The underwriting procedure considers several factors, such as age, profession, current health condition, family medical history, gender, lifestyle, policy duration, and the sum assured. It also depends on the type of policy like whole life insurance, endowment plans, and unit-linked insurance plans (ULIPs).


  • Mortality charges


The life insurance premium calculation includes the actuarial factors and uses statistical and mathematical methods to assess the potential risk. These calculations consider the possibility of death among people in a particular age group to determine the chances of a claim.

Generally, younger individuals are considered less risky and therefore, get insurance at an economical premium when compared to an older person. This is because the possibility of any critical illness, pre-existing disease (PED), or other issues is lower when you are younger and healthier.


  • Expenditure and profitability margins


You may use an online life insurance premium calculator to determine the approximate amount you will pay to avail of such coverage. However, in addition to factors related to you, insurance companies consider other aspects to determine the premium. 

Insurers incur certain expenses to provide life insurance coverage, which also affects the premium. Every insurer has distinct cost structures, risk assessment methodology, and return on investments (ROI).

While calculating the premium on different policies like whole life insurance plans or ULIPs, operational costs are included. Some operational expenses include policy document cost, commission paid to the agents or brokers, and other overheads and miscellaneous expenditures. Therefore, the profit margins earned by the insurer from the sale of policy also determine the applicable premium on your chosen insurance plan. 


  • Contingency charges


Insurers also consider any contingency charges while calculating the premium. The company is unable to predict the number of claims it may receive during the year. Therefore, a small contingency charge added to the premium spread over a larger pool of policyholders helps the insurance companies to maintain their financial stability in case of a higher number of claims during the year. Therefore, this cost also marginally increases the premium.

Although the premium may differ among insurers, an online life insurance premium calculator will give you an idea about the estimatedcost. It is recommended you check this to opt for a policy that fits within your budget.