How to save premium costs on your life insurance purchase

By Guest |  31-10-18 | 
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Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

A life insurance policy is just a contract between and individual and the insurance company.

In exchange for premium payments from the insured, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured's death.

Term Insurance puts together a few aspects that will help individuals avail of a lower premium.

  • Premium to be paid depends on a number of factors

The premium amount for a policy depends on a variety of factors such as the chances of a claim to be made, type of life insurance policy, the area of residence of the individual or the area from which the business operates, etc. The higher the risk connected to a policy, the higher will be the premium.

The premium amount might be increased once the policy period finishes. It can be increased by the insurance company in case the risk associated with the policy increases, claims have been made in the previous period or if the cost of providing the insurance cover increases.

  • Buy a life insurance policy early

One of the major advantages of buying a life insurance policy when you are young is that you’ll be able to get a lower premium rate. As you age, the premium amount keeps increasing. This is because the premium amount is calculated based on the probability of an applicant making a claim in the future.

The younger the individual is at the time of applying for the life insurance policy, the less is the chance that the insurance company will have to pay for a claim. Hence, premiums on life insurance are lower for young individuals and increase with age as the providers adjust the premium to cover the higher risk of the claim in case of death of the applicant.

  • Make premium payments annually

Premium payments can be made in a number of ways. You can either pay them in instalments, as in monthly, half-yearly or annual payments. Alternatively, it can be paid as a lump sum amount before the policy begins.

Some insurance companies charge an additional amount for choosing the monthly premium payment mode. To avoid this, you can opt for half-yearly or annual mode of premium payment.

The fewer payments you make towards premium over the tenure of your policy, the lesser will be the overall amount paid by you. Some companies also provide an option wherein if you are making the payment directly from your checking account, you’ll be charged less for your overall payment.

  • Choose a Term Plan

Term insurance plans are cheaper when compared to other types of life insurance policies as they only provide death benefit. This is unlike other policies like whole life and ULIPs (which are unit linked insurance plans) that provide a maturity and death benefit. Due to this, term insurance policies have lower levels of premium. The difference in the premium payments is not marginal and sometimes premium on whole life policies can be around 5-10 times more as compared to a term life plan.

  • Choose the optimum tenure

The period for which the life insurance policy is taken should be optimum. In case of a term insurance policy, the optimum period can be the tenure chosen till the time the insured needs to fulfil her/his financial obligations.

It is not advisable to buy a term plan for a period greater than that. In case the individual wants to definitely leave a certain amount for his/her dependants, a whole life policy should be chosen as renewing term plans is costly due to increased premium amount.

  • Avoid purchasing life insurance policy through brokers

In order to save unnecessary costs, a life insurance policy should be purchased directly with the company or via online mediums. Brokers sell life insurance policies by charging a commission for every purchase. These commissions are added to the premium costs of the policy. Therefore, if you want to avoid increasing the premium amount, avoiding brokers/agents would be a great choice.

  • Maintain a healthy lifestyle

The premium costs also depend on the health condition of the insured. Insurance companies pay attention to the medical history of the applicant while underwriting a life insurance policy. The premium of a life insurance policy assigned for a smoker can be as high as 10 times the premium payment for a non-smoker. Thus, you should make an effort to lower the mortality risk to lower the premium amount by following a healthy lifestyle.

  • Lock-in premiums

Some policies, known as level premium policies, allow the individual to lock in premium payments for a specified period of time like 5 or 10 years. This means that the premium payments remain the same for the specified period of time.

  • Make comparisons before you buy a life insurance policy

Do not decide to buy a life insurance policy purely on the basis of a recommendation or because you saw an advertisement that impressed you. There is always a chance that the policy won’t be sufficient to cover all your financial needs.

Compare all the available options and choose a life insurance policy which perfectly fits your needs and budget. Compare quotes of different policies provided by different insurance companies and choose the one which has affordable premium but still provides adequate coverage.

While all the mentioned tips can be kept in mind while choosing a policy which can help you save on the premium, please do not compromise on the features, benefits and the purpose for which the life insurance policy is to be purchased.

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