Important things to know about paying life insurance premium
By J.M. Sawhney
Most of us know that a premium is the price paid for buying an insurance policy but several premium-related aspects are less well understood. What determines discounts offered on life insurance policy premiums? What are the different types of life insurance premiums? Premium payment frequency and what happens if you forget to pay? Did you know tax benefit is available only on premium paid for life insurance policies in your name or in the name of specified relatives? Basic knowledge of these is necessary to be able to choose and maintain your life insurance policy.
What is life insurance premium?
Insurance is a contract between the insurance company and the life assured and every contract to be enforceable under law must involve a valid consideration. In this case, premium is the consideration which makes the contract complete.
An insurance premium is generally expressed as premium per thousand rupees of sum assured and is illustrated in the form of tables of premium rates by insurance companies. Premium varies across insurance plans, policy terms, sum assured and the age of the proposer. Periodicity or mode of premium payment depends on the type of policy chosen and also on the payment options that the policy offers.
In advance
Premium is required to be paid in advance and can be paid via cash up to Rs 50,000, (the limit set by IRDA for cash payments) cheque or DD. Further, most insurance companies have provided for payment of premium online.
Discounts offered on life insurance premiums
Often companies offer a discount on the premium rate payable on the basis of sum assured (SA) and the mode of payment of premium. In insurance jargon these discounts are called rebates.
Rebate for sum assured
Typically most companies offer rebates for higher SA (higher than a certain amount). This is because the cost of servicing of all policies of the same type being almost the same, a higher SA means lower servicing cost per unit of SA. Consequently, this translates to higher profits/returns per unit of SA or per unit of premium paid for the company.
Rebate for periodicity of premium
In case of periodic premium payment policies one can normally choose to pay premium annually, half yearly, quarterly or monthly depending on one's cash flow situation. However, higher the frequency of premium payment higher the cost of servicing (collection, processing and administrative costs) for the company. Also, if the premium is paid at one go for the whole year the funds are available (for investment) to the company for longer than in monthly mode of payment. Consequently, the company can earn more returns on the premium paid.
In case of single or limited premium payment policies this rebate is often already worked into the premium rate as the mode of payment is structurally built into the policy.
Rebate for online payment
It needs to be mentioned here that a company's servicing cost for premiums paid online is normally lower than for those paid physically. Additionally, the company also saves on commissions generally paid to agents in case of physically sold policies. Therefore, varying from company to company, rebate may have already been given before the online premium payment rates are quoted. Consequently, the premium rates quoted would already include the rebate, else the rebates offered may be higher than those offered for physical payment.
Extra Premium
The normal premium tables are meant for people who do not carry any additional risk or 'standard lives' in insurance parlance. In case of standard lives the ordinary premium rates are applied. However, in case of people who carry extra risk because they suffer from health problems such as diabetes or heart disease or work in hazardous occupation the insurer may charge extra premium over and above the normal rate.
Extra premium is also charged for any additional insurance covers (called 'Add Ons' or 'riders' in insurance jargon) are bought along with the base policy.
Level premium
When the premium charged under a policy remains the same throughout the duration of the contract, it is called level premium. In this case premium level is guaranteed and cannot be changed by the company at a later date. This is advantageous for both the life assured and the insurance company and therefore most life insurance plans except some term insurance plans involve level premium payment.
Term insurance policies are associated with level premiums or increasing premiums depending on the type of policy and the insurance company. In term insurance policies the mortality risk of the life insured increases year by year and therefore the cost of insurance also increases yearly. Consequently, the premium chargeable also increases annually. However, in many term policies the insurer averages out the premium chargeable over the entire policy period and the average premium is charged as a level premium throughout the policy tenure. Such term insurance policies are characterized by level premium payments.
The advantages of level premium are:
-- As mortality risk increases with the age of the insured the actual premium chargeable at higher age is much more than that chargeable when a person is young. It may happen that the premium applicable when the life insured is older may be too high for him to pay and a policy lapse due to non-payment of premium would leave him without insurance cover at an age when he needs it most.
-- Persons with good health may drop out and the insurance company may be left with only sub-standard lives as time goes by.
-- It is administratively difficult for the insurance company to keep track of, levy and collect varying premiums.
Increasing and decreasing premium
A term plan with increasing premiums (as explained above) is a typical example of increasing premiums.
Decreasing premium is applicable in mortgage redemption policies where the premium goes down with the decrease in the policy holder's outstanding loan amount.
Single premium
Single premium policies are normally targeted at people who are in the higher income bracket or those who have idle money with them.
Non-payment & late payment of premium
In case the premium is not paid on the due date, the policy is considered as lapsed and the policyholder loses its benefits.
Most policy contracts, however, provide for a 'grace period', which gives the policy holder an additional period of time after the due date for the payment of the premium. During this period, he can pay the premium without any extra charge and the policy will still continue to be in force. For all life insurance policies other than term insurance, for monthly mode of payment, the grace period is usually 15 days, while for other frequency of payments (quarterly, half-yearly or yearly) it is usually one month but not less than 30 days (This means that in case of February generally 30 days grace is still given). For term insurance policies, the grace period is normally 15 days.
When a policy has lapsed, it can be revived and brought to its full force by payment of overdue premiums (with interest) and a declaration about state of health or fresh medical examination. However, a lapsed policy can be revived only if the insurer agrees to do so.
Tax benefit available only for premium paid for specified persons
Under Section 80C of the Income Tax Act, any amount paid by a policyholder towards life insurance premium for self, spouse or his/her children can be claimed as deduction from taxable income. Premium paid for policies in the name of any other third party (other than spouse or children) such as parents (father / mother / both) or in-laws is not eligible for deduction under section 80C. If a person is paying premium for more than one insurance policy, all the premiums can be included. The benefit is available for life insurance policies sold by all insurance companies - both public and private sector.
(The author is former zonal manager, Life Insurance Corporation of India)
Most of us know that a premium is the price paid for buying an insurance policy but several premium-related aspects are less well understood. What determines discounts offered on life insurance policy premiums? What are the different types of life insurance premiums? Premium payment frequency and what happens if you forget to pay? Did you know tax benefit is available only on premium paid for life insurance policies in your name or in the name of specified relatives? Basic knowledge of these is necessary to be able to choose and maintain your life insurance policy.
What is life insurance premium?
Insurance is a contract between the insurance company and the life assured and every contract to be enforceable under law must involve a valid consideration. In this case, premium is the consideration which makes the contract complete.
An insurance premium is generally expressed as premium per thousand rupees of sum assured and is illustrated in the form of tables of premium rates by insurance companies. Premium varies across insurance plans, policy terms, sum assured and the age of the proposer. Periodicity or mode of premium payment depends on the type of policy chosen and also on the payment options that the policy offers.
In advance
Premium is required to be paid in advance and can be paid via cash up to Rs 50,000, (the limit set by IRDA for cash payments) cheque or DD. Further, most insurance companies have provided for payment of premium online.
Discounts offered on life insurance premiums
Often companies offer a discount on the premium rate payable on the basis of sum assured (SA) and the mode of payment of premium. In insurance jargon these discounts are called rebates.
Rebate for sum assured
Typically most companies offer rebates for higher SA (higher than a certain amount). This is because the cost of servicing of all policies of the same type being almost the same, a higher SA means lower servicing cost per unit of SA. Consequently, this translates to higher profits/returns per unit of SA or per unit of premium paid for the company.
Rebate for periodicity of premium
In case of periodic premium payment policies one can normally choose to pay premium annually, half yearly, quarterly or monthly depending on one's cash flow situation. However, higher the frequency of premium payment higher the cost of servicing (collection, processing and administrative costs) for the company. Also, if the premium is paid at one go for the whole year the funds are available (for investment) to the company for longer than in monthly mode of payment. Consequently, the company can earn more returns on the premium paid.
In case of single or limited premium payment policies this rebate is often already worked into the premium rate as the mode of payment is structurally built into the policy.
Rebate for online payment
It needs to be mentioned here that a company's servicing cost for premiums paid online is normally lower than for those paid physically. Additionally, the company also saves on commissions generally paid to agents in case of physically sold policies. Therefore, varying from company to company, rebate may have already been given before the online premium payment rates are quoted. Consequently, the premium rates quoted would already include the rebate, else the rebates offered may be higher than those offered for physical payment.
Extra Premium
The normal premium tables are meant for people who do not carry any additional risk or 'standard lives' in insurance parlance. In case of standard lives the ordinary premium rates are applied. However, in case of people who carry extra risk because they suffer from health problems such as diabetes or heart disease or work in hazardous occupation the insurer may charge extra premium over and above the normal rate.
Extra premium is also charged for any additional insurance covers (called 'Add Ons' or 'riders' in insurance jargon) are bought along with the base policy.
Level premium
When the premium charged under a policy remains the same throughout the duration of the contract, it is called level premium. In this case premium level is guaranteed and cannot be changed by the company at a later date. This is advantageous for both the life assured and the insurance company and therefore most life insurance plans except some term insurance plans involve level premium payment.
Term insurance policies are associated with level premiums or increasing premiums depending on the type of policy and the insurance company. In term insurance policies the mortality risk of the life insured increases year by year and therefore the cost of insurance also increases yearly. Consequently, the premium chargeable also increases annually. However, in many term policies the insurer averages out the premium chargeable over the entire policy period and the average premium is charged as a level premium throughout the policy tenure. Such term insurance policies are characterized by level premium payments.
The advantages of level premium are:
-- As mortality risk increases with the age of the insured the actual premium chargeable at higher age is much more than that chargeable when a person is young. It may happen that the premium applicable when the life insured is older may be too high for him to pay and a policy lapse due to non-payment of premium would leave him without insurance cover at an age when he needs it most.
-- Persons with good health may drop out and the insurance company may be left with only sub-standard lives as time goes by.
-- It is administratively difficult for the insurance company to keep track of, levy and collect varying premiums.
Increasing and decreasing premium
A term plan with increasing premiums (as explained above) is a typical example of increasing premiums.
Decreasing premium is applicable in mortgage redemption policies where the premium goes down with the decrease in the policy holder's outstanding loan amount.
Single premium
Single premium policies are normally targeted at people who are in the higher income bracket or those who have idle money with them.
Non-payment & late payment of premium
In case the premium is not paid on the due date, the policy is considered as lapsed and the policyholder loses its benefits.
Most policy contracts, however, provide for a 'grace period', which gives the policy holder an additional period of time after the due date for the payment of the premium. During this period, he can pay the premium without any extra charge and the policy will still continue to be in force. For all life insurance policies other than term insurance, for monthly mode of payment, the grace period is usually 15 days, while for other frequency of payments (quarterly, half-yearly or yearly) it is usually one month but not less than 30 days (This means that in case of February generally 30 days grace is still given). For term insurance policies, the grace period is normally 15 days.
When a policy has lapsed, it can be revived and brought to its full force by payment of overdue premiums (with interest) and a declaration about state of health or fresh medical examination. However, a lapsed policy can be revived only if the insurer agrees to do so.
Tax benefit available only for premium paid for specified persons
Under Section 80C of the Income Tax Act, any amount paid by a policyholder towards life insurance premium for self, spouse or his/her children can be claimed as deduction from taxable income. Premium paid for policies in the name of any other third party (other than spouse or children) such as parents (father / mother / both) or in-laws is not eligible for deduction under section 80C. If a person is paying premium for more than one insurance policy, all the premiums can be included. The benefit is available for life insurance policies sold by all insurance companies - both public and private sector.
(The author is former zonal manager, Life Insurance Corporation of India)
