What Is Insurance Premium and How Does It Work?

Life is a beautiful adventure with its fair share of ups & downs. The downs can strike unannounced in the form of diseases, accidents, property damage, or even a global pandemic. While it's difficult to foresee these events and plan ahead, an insurance policy can protect you and your loved ones. It mitigates the financial impact of such instances and cushions your family when they need it the most. But the fundamental of insurance requires paying a premium from time to time. So, if you are wondering what is an insurance premium, don’t worry. Read along to clear all your concepts.

What is an Insurance Premium?

An insurance premium is the payment made by a policyholder to an insurance company in exchange for coverage. It can be paid annually, quarterly, or monthly, depending on the policy agreement. In simpler terms, it’s the cost of your insurance policy. The amount of the premium depends on several factors, including the type of coverage, the amount of coverage, and the risk profile of the insured person or property. For example, the premium for car insurance might be higher if the vehicle is expensive or used in high-risk conditions, while health insurance premiums may vary based on age, health status, and coverage options.

How Does Insurance Premium Work?

Insurance premiums work by providing you with coverage in exchange for a specified payment. As long as you continue to pay the premium, the insurance company is obligated to cover any claims made under the terms of your policy. If you fail to make your premium payments, your coverage may lapse, leaving you unprotected in case of an unforeseen event. With car insurance, for instance, you need to pay your premium regularly to ensure you are covered in case of an accident or damage. The same applies to health insurance, where regular premium payments keep your medical coverage active.

Types of Insurance Premiums

Here are the different types of insurance premiums that you can opt for while purchasing any general insurance policy.

Classification Factor	Type of Insurance Premium
Premium Paid	Level Premium
	Flexible Premium
Insurance Purchased	Life Insurance Premium
	Health Insurance Premium
	Travel Insurance Premium
	Car Insurance Premium
Mode of Payment	Monthly
	Quarterly
	Semi-Annually
	Annually
	Up-Front

Factors Affecting Insurance Premium Amount

When dealing with general insurance, there can be several factors that affect the amount you may have to pay for your premium to get the benefits. Most policy-holders buy insurance with the mindset ‘What is a premium compared to the sum assured?’, and this often causes them to end up with higher premiums. It’s good to buy policies after knowing what exactly you are being charged for. The table given below explains these factors concisely:

Factor	Affect	Type of General Insurance
Mode of Premium Payment	Upfront payments cost less than monthly or quarterly plans	All
Mode of Policy Purchase	Buying policies offline can cost more since they include the commission of the employees	All
Profession	Your profession can affect the cost of your premium as professions with higher risks increase the chances of you claiming the benefits	Life, Car
Age	With a higher age comes a higher risk of falling sick with fatal diseases, and as a result, you may have to pay a higher premium	Life, Health
Smoking and Drinking	Habits that can harm your health are bound to increase your premium amount	Life, Health
Driving History	If you have a history of rash driving or DUI, this can cause a significant increase in your insurance premiums	Life, Car
Home Location	Homeowners in earthquake-prone zones often are charged higher premiums than those who are in safer regions	Life, Home

How Do Insurance Companies Calculate Premiums?

Insurance companies use a variety of factors to calculate premiums. The aim is to assess the risk of providing coverage and determine how likely a claim will be made. The higher the risk, the higher the premium. Let’s look at some of the factors that influence how to calculate insurance premiums:

1. Type of insurance

Different types of insurance, such as car insurance and health insurance, have different risk factors. A policyholder driving in a high-risk area might have a higher premium compared to someone driving in a safer environment.

2. Coverage amount

The more coverage you need, the higher your premium. For example, a health insurance policy with extensive coverage will cost more than a basic plan with limited benefits.

3. Risk assessment

Insurance companies assess the risk involved in insuring a person or property. For car insurance, this might include factors like driving history, age, and the type of vehicle. For health insurance, it could be your age, medical history, and lifestyle.

4. Claims history

A history of claims could increase your premium because it indicates a higher likelihood of future claims. By evaluating these factors, insurance companies calculate the appropriate premium that reflects the level of risk involved.

Things to Consider When Buying an Insurance Policy

When purchasing an insurance policy, several important factors should be considered to ensure you’re getting the right coverage:

1. Coverage needs

Evaluate what type of coverage you need. For instance, comprehensive car insurance may provide more protection than a basic third-party policy, but it will come with a higher premium.

2. Premium affordability

While it’s tempting to go for maximum coverage, consider whether the premium fits within your budget. It’s important to balance coverage with affordability.

3. Reputation of the insurer

Ensure you are choosing a reputable insurance company with a good claim settlement ratio like Bajaj Allianz General Insurance Company. This ensures claims are processed smoothly and fairly.

4. Policy exclusions

Always check what is not covered under the policy. This helps avoid any surprises when you file a claim. By carefully considering these factors, you can make an informed decision when buying an insurance policy.

How to Save Money on Insurance Premiums

Now that you know what is a premium calculation mode, you can use this knowledge to get lower premiums in your insurances. Here are some of the best ways to score lower premiums on your insurance policies:

1. Impulsive Decisions Aren’t Your Friends

Impulsive shopping can cause you to pay a higher premium than needed. It is always a good idea to check around with other providers and compare prices before buying a policy.

2. Buy the Policy Directly

When you ask an agent ‘what is the insurance premium amount’, you won’t be given the actual premium amount, but rather an amount that includes his commission.

3. Stick with One Provider

Most modern providers offer all insurance policies which makes it possible to get all your policies from the same provider. This can help you score discounts on future policy purchases.

4. Pick a highly rated insurance company

“What is the insurance premium I have to pay”- Sure, this is the first question that might come to your mind while you shop around and compare the insurance companies but cheap isn’t good here. Always, go with a reputed and highly rated company (that scored high from independent agencies). After all, it’s your money!

5. Avoid Small Claims

Making frequent claims on your insurance can remove your No Claim Bonus, and also result in higher premiums for future insurance policies.

How Do Insurers Use Life Insurance Premiums?

Insurance companies use life insurance premiums to invest and generate returns, which are then used to pay out claims, cover administrative costs, and maintain the company’s financial health. A portion of the premium goes toward covering the risk of the insured event, while the rest may be used for investments that help the company grow its financial reserves.

What Happens if You Stop Paying Your Life Insurance Premiums?

If you stop paying your life insurance premiums, your policy will likely lapse after a certain period, meaning you will no longer have coverage. In some cases, if you have accumulated enough cash value in your policy, it might be used to keep the policy active temporarily, but eventually, it will expire if no further payments are made.

How to Pay Life Insurance Premiums?

You can pay life insurance premiums through several methods, including bank transfers, automatic deductions, or online payments via the Bajaj Allianz General Insurance Company’s portal. We also offer the option to pay premiums monthly, quarterly, or annually, depending on what best suits your financial situation.

Conclusion

Now that you know what is an insurance premium and the factors is affecting it, you can pick the insurance provider that gives you maximum benefits with an insurance premium best suited to your pocket.

FAQs

Can the premium change during the tenure?

Yes, for certain types of insurance, such as health insurance, premiums may change during the tenure based on factors like age, medical inflation, or changes in coverage options. Always check with Bajaj Allianz General Insurance Company to understand how and when premiums may be adjusted.

What happens if I cannot pay the insurance premium on time?

If you miss a premium payment, most insurance policies offer a certain period during which you can make the payment without losing coverage. However, if the premium is not paid within this period, your policy may lapse.

Can I make a claim during the grace period?

Yes, most insurance policies allow you to file a claim during the grace period, provided you make the outstanding premium payment within the specified timeframe.

What Is a Waiver of Premium Rider?

A waiver of premium rider is an add-on to your insurance policy that allows you to skip premium payments if you become disabled or unable to work due to illness or injury. This rider ensures that your policy remains active even if you cannot pay the premium.

What Happens If I Stop Paying Insurance Premiums?

If you stop paying premiums, your policy will lapse after the grace period, and you will lose coverage. Some policies may offer options to reinstate the coverage, but this is typically subject to additional fees and conditions.

Is Any Grace Period Available for Payment of the Premium?

Yes, Bajaj Allianz General Insurance Company policies offer a grace period, typically ranging from 15 to 30 days, during which you can pay the premium without losing your coverage. Be sure to check the details in your policy document.