How is Life Insurance Premium Calculated?

While purchasing life insurance, we do not much have control over our payable life insurance premiums and may not worry much about how insurance premium is calculated. The insurance firm calculates it and we can only chose to accept or reject the offer. However, knowing how to calculate premium of life insurance and the key deciding factors can help us understand what we are factually looking at in our premium calculations.

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

Listed below are some known crucial factors that influence how insurance premium is calculated:

Personal factors

AgeIt is best to get life insurance as early as possible, since age and life insurance premiums are directly proportional. Age affects how insurance premium is calculated crucially - younger people are healthier and therefore get the best premiums, while older people, more prone to health problems, pose a higher risk to insurers, hence premiums are higher too.

GenderIt is seen that women normally go to doctors more often than men, and are generally diagnosed for risky health conditions earlier. Therefore, they end up paying lesser towards their life insurance premiums.

Weight and height : Insurers consider height and weight as they indicate a person’s body mass index. Obese people are more likely to suffer from weight-related medical disorders and this affects how insurance premium is calculated.

Medical history : Self and family : Your health history is a critical factor in your premium computation. Health disorders, past or current, and family history of ailments, are the main contributing factors. However, the extent to which your medical history influences your premium depends on the severity of your previous illnesses, or health issues you may currently be suffering from. For instance, if you can prove that you have fully recovered from a serious health disorder, for instance, cancer, or can show that you are taking good care of a chronic problem like diabetes, then the evidence could lead to lowering your premium. However, this reduction depends on the life insurance companies and the type of insurance applied for. Particularly in case of cancer recovery, most insurers do not offer protection until the individual proves that he/she has been in remission for a minimum of five years.

Whether your family medical history is factored in depends on the severity of the health condition, number of close family members affected, and their age when they fell ill.

Marital status : Marital status plays an important role while processing insurance applications and deciding the premium. As a couple, if you take joint life insurance, you should remember that such policies work on a first-death basis, meaning there is no payout on the second partner’s demise.

Dependents : The number of dependents you have plays a role in calculating the amount of protection you need. More protection needed translates to a higher premium.

Occupation : Some occupations are deemed riskier than others by insurers who formulate how to calculate premium of life insurance. Pilots, soldiers, anglers, offshore oil or gas industry workers, etc. can expect higher premiums compared to those working in comparatively safer environments like offices, shops, or schools.

Income : Insurers consider your income to evaluate if you will be able to afford regular premium payments.

Debts : Any outstanding debts, including loans, mortgages, credit card bills, etc. are major influencers towards the amount of protection you need.

Smoking and alcohol consumption : Insurers do not make distinctions between whether you are a light or heavy smoker - you will be classified as a smoker irrespective, causing your premium to skyrocket.

Similarly, excessive alcohol consumption could lead to a rise in insurance premiums because it increases the chances of suffering from alcohol-related health problems.

International travelIf you have visited places that pose potential health risks, for instance, you travelled to a country with a high incidence of tropical diseases or HIV, then the premium calculation will be on the higher side. Your premium is also affected if you regularly travel abroad for work.

High-risk hobbies :Participating in high-risk hobbies such as horse riding, rock climbing, motorsports, sky diving, etc. could affect premiums negatively as it increases the likelihood of accidents.

Insurer-Related Factors

Mortality cost : This is the amount to be paid by life insurance firms on insurance policies. Insurers consider the applicant’s age, health history (self and family), driving records, employment, hobbies, etc. while determining how to calculate the premium of life insurance.

Operating costThe total operational costs that insurance firms incur towards marketing and non-marketing expenses like maintenance, rent, salaries, legal fees, agents’ commission, etc. influence their life insurance policy and how insurance premium is calculated.

InterestInsurance firms invest policyholders’ premiums in bonds, stocks, real estate, etc., on the presumption that a specific rate of interest will be earned on the invested funds. This interest earning is another critical factor used when insurers determine how to calculate premium of life insurance.

Policy-Related Factors

Whole versus Term : A life insurance policy that covers until death, also called a whole-of-life policy, usually involves higher premiums in comparison with a term insurance policy, which offers cover only for a fixed number of years.

Decreasing payoutsHow insurance premium is calculatedis influenced by whether you opt to have the quantum of protection decrease year after year, or whether you decide on having a fixed amount of cover for the entire policy duration.

CoversIn case of couples who take a joint life cover, premiums are higher because the policy is more likely to see a claim at some point.

Including a critical illness cover for serious health disorders like diabetes, hypertension, heart disease, etc. increase monthly premiums. This cover can be very expensive, especially for those aged 60 years and above, or those suffering from pre-existing medical conditions.

Concluding

To get the best coverage at affordable prices, it is imperative to take the time and effort to do thorough research online and offline. This will help you learn how insurance premium is calculated and find excellent life insurance offerings that suit you perfectly, come at inexpensive premium rates and offer the best compensation.

Understanding the aforementioned factors will help immensely when you are looking for the right life insurance policy best suited for you, your family and your life circumstances.

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-01-2025

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).