{"id":6057,"date":"2021-12-15T16:29:57","date_gmt":"2021-12-15T10:59:57","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=6057"},"modified":"2022-05-24T10:44:33","modified_gmt":"2022-05-24T05:14:33","slug":"what-is-an-insurance-premium","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/","title":{"rendered":"What Is Insurance Premium \u2013 Definition, Importance and How It Works"},"content":{"rendered":"\n<p>When you purchase goods and services, you pay the price for them. Similarly, when it comes to buying insurance plans, a premium is payable for the policy that you buy. Most policyholders consider the premium to be the cost of the insurance policy. While, in layman terms, the premium is a cost, it has a more technical meaning attached to it.\u00a0Let\u2019s understand what insurance premiums are all about.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#What-is-an-insurance-premium\" title=\"What is an insurance premium?\">What is an insurance premium?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#How-is-the-premium-calculated\" title=\"How is the premium calculated?\">How is the premium calculated?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#Factors-affecting-premium-calculation\" title=\"Factors affecting premium calculation\">Factors affecting premium calculation<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#Factors-affecting-life-insurance-premiums\" title=\"Factors affecting life insurance premiums\">Factors affecting life insurance premiums<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#Factors-affecting-health-insurance-premiums\" title=\"Factors affecting health insurance premiums\">Factors affecting health insurance premiums<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#Factors-affecting-motor-insurance-premiums\" title=\"Factors affecting motor insurance premiums\">Factors affecting motor insurance premiums<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#Factors-affecting-travel-insurance-premiums\" title=\"Factors affecting travel insurance premiums\">Factors affecting travel insurance premiums<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#Insurance-premiums-and-taxation\" title=\"Insurance premiums and taxation\">Insurance premiums and taxation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-an-insurance-premium\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-is-an-insurance-premium\"><\/span>What is an insurance premium?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In technical terms, an insurance premium is the cost of the financial risk that you transfer to the insurance company. The insurance company promises to compensate you if you suffer a specific financial loss.&nbsp;<\/p>\n\n\n\n<p>For instance, in a <a href=\"https:\/\/www.tickertape.in\/blog\/health-insurance-emergency-fund\/?utm_source=blog&amp;utm_medium=article\">life insurance policy<\/a>, you insure the risk of premature death. The insurance company promises to pay a death benefit to your benefactor, should an untoward incident occur resulting in the loss of your life during the policy term. For this assurance, the company charges a premium which includes the cost of risk that the company is undertaking to insure you.&nbsp;<\/p>\n\n\n\n<p>In legal terms, the premium paid is the consideration for the insurance contract. You pay the premium, and in exchange, the insurance company promises to cover your financial risk and compensate you for the loss if the risk occurs.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how\"><span class=\"ez-toc-section\" id=\"How-is-the-premium-calculated\"><\/span>How is the premium calculated?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are different components to insurance premiums. Primarily, what the insurance company charges is the basic cost of insuring the financial risk. Besides this cost, the premium includes the following charges as well:<\/p>\n\n\n\n<ul><li>The administrative costs incurred in issuing the policy<\/li><li>The costs of managing the policy<\/li><li>The sales and distribution costs<\/li><\/ul>\n\n\n\n<p>All these costs are added to calculate the premium payable for the policy. These calculations are done by the insurance company internally. When you buy an insurance policy, you know the aggregate premium payable for the coverage, generally, not the break-up. This is where the difference in cost from provider to provider happens.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"factors\"><span class=\"ez-toc-section\" id=\"Factors-affecting-premium-calculation\"><\/span>Factors affecting premium calculation<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>While the insurance company fixes the basic premium for an insurance policy, the actual premium payable depends on many factors. These factors either increase or decrease the premium. Moreover, the factors vary depending on the type of policy that you buy. So, here\u2019s a look at some of the most common forms of insurance plans and the primary factors that affect their premiums:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Factors-affecting-life-insurance-premiums\"><\/span>Factors affecting life insurance premiums<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Factors&nbsp;<\/strong><\/td><td><strong>Impact&nbsp;<\/strong><\/td><\/tr><tr><td>Age&nbsp;<\/td><td>Your age impacts your death risk. The higher the age, the higher the death risk. As such, premiums increase with age.<\/td><\/tr><tr><td>Medical history&nbsp;<\/td><td>If you have past or current medical complications, the premiums would increase.<\/td><\/tr><tr><td>Family history&nbsp;<\/td><td>If there is a history of disease in the family, the premium would increase.<\/td><\/tr><tr><td>Sum assured&nbsp;<\/td><td>The coverage directly impacts the premium. The higher the sum assured, the higher the premium and vice-versa.<\/td><\/tr><tr><td>Lifestyle habits<\/td><td>If you indulge in smoking, the premiums would increase. Similarly, the premium would increase if you drink regularly, given the increased health risks.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Factors-affecting-health-insurance-premiums\"><\/span>Factors affecting health insurance premiums<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Factors&nbsp;<\/strong><\/td><td><strong>Impact&nbsp;<\/strong><\/td><\/tr><tr><td>Age&nbsp;<\/td><td>The higher the age, the higher would be the chances of illnesses. As such, premiums are higher for older individuals.<\/td><\/tr><tr><td>Medical conditions<\/td><td>If you have existing medical conditions or have suffered from any complications in the past, the health risk would be higher. As such, the premiums would be higher.<\/td><\/tr><tr><td>Sum insured&nbsp;<\/td><td>The higher the sum insured chosen, the higher would be the premium charged.<\/td><\/tr><tr><td>Members insured&nbsp;<\/td><td>The premium would increase if you cover two or more family members under floater coverage. The member\u2019s age would also be considered in premium calculation.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Factors-affecting-motor-insurance-premiums\"><\/span>Factors affecting motor insurance premiums<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Factors&nbsp;<\/strong><\/td><td><strong>Impact&nbsp;<\/strong><\/td><\/tr><tr><td>Make, model and variant of the vehicle<\/td><td>The make, model and variant determine the vehicle\u2019s value\u2014higher the value, higher the premium and vice-versa.<\/td><\/tr><tr><td>Registration date<\/td><td>The registration date determines the age of the vehicle. Older vehicles have depreciated values, and so, the premiums are lower.<\/td><\/tr><tr><td>Registration location<\/td><td>Premiums for vehicles registered in metro cities are higher than in non-metro cities.<\/td><\/tr><tr><td>Type of policy<\/td><td><a href=\"https:\/\/www.tickertape.in\/blog\/what-is-third-party-insurance\/?utm_source=blog&amp;utm_medium=article\">Third-party<\/a> policies are cheaper compared to <a href=\"https:\/\/www.tickertape.in\/blog\/comprehensive-insurance\/?utm_source=blog&amp;utm_medium=article\">comprehensive plans<\/a>, given the scope of coverage.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Factors-affecting-travel-insurance-premiums\"><\/span>Factors affecting travel insurance premiums<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Factors&nbsp;<\/strong><\/td><td><strong>Impact&nbsp;<\/strong><\/td><\/tr><tr><td>Destination&nbsp;<\/td><td>The premium depends on where you are travelling. Developed countries involve higher premiums since they are expensive.<\/td><\/tr><tr><td>Trip duration<\/td><td>The longer the trip duration, the higher would be the premium and vice-versa.<\/td><\/tr><tr><td>Age&nbsp;<\/td><td>Higher the age, higher would be the premium and vice-versa.<\/td><\/tr><tr><td>Members insured<\/td><td>If you insure two or more members under a floater plan, the premium would increase as each member\u2019s premium would be added to the aggregate amount.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"insurance\"><span class=\"ez-toc-section\" id=\"Insurance-premiums-and-taxation\"><\/span>Insurance premiums and taxation<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Life and <a href=\"https:\/\/www.tickertape.in\/blog\/the-secret-of-smoking-tobacco-and-health-insurance\/?utm_source=blog&amp;utm_medium=article\">health insurance<\/a> premiums allow tax benefits. Premiums paid for a life insurance policy qualify for a deduction under Section 80C of the <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-income-tax\/\">Income Tax<\/a> Act, 1961. You can claim a deduction of up to Rs. 1.5 lakh on the premium amount. However, the premium should be limited to 10% of the sum assured. If the premium exceeds 10% of the assured sum, the deduction would be allowed only on the premium, up to 10% of the coverage amount. The excess premium would form a part of your taxable income.<\/p>\n\n\n\n<p>In the case of health insurance policies, premiums paid for self, spouse and dependent children are allowed as a deduction under <a href=\"https:\/\/www.tickertape.in\/blog\/section-80d-of-income-tax\/\">Section 80D<\/a>. The limit is Rs. 25,000 if you are younger than 60 yrs old and Rs. 50,000 if you are a senior citizen. Moreover, suppose you insure your parents and pay a premium for their policy. In that case, the premium can be claimed as an additional deduction, i.e. in addition to the deduction available on your family\u2019s premium. The additional deduction limit is Rs. 25,000 if your parents are below 60 yrs and Rs. 50,000 if they are senior citizens.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Premiums are the cost of insuring your risks. Many insurance plans allow you to pay premiums in instalments (annually, quarterly, half-yearly or monthly) too. So, after assessing your coverage needs, you may opt for suitable insurance plans. Choose optimal coverage and pick schemes that have premiums that are affordable to you. Pay your premiums on time and enjoy the financial security that insurance plans offer. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Looking to know what is insurance premium and what is its significance when buying a policy? Read on to find out insurance premium meaning and all important details about it.<\/p>\n","protected":false},"author":45,"featured_media":6071,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[8,1737],"tags":[960,1083,1085,1084],"acf":[],"modified_by":"Anjali Chourasiya","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/12\/6.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/6057"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/45"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=6057"}],"version-history":[{"count":5,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/6057\/revisions"}],"predecessor-version":[{"id":8543,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/6057\/revisions\/8543"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/6071"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=6057"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=6057"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=6057"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}