What is premium for insurance and how it works?

We all make certain investments for our future be it in gold, shares, or something else.
But while doing all of these we forget that we do not know what the future holds for us. Getting insured is making yourself ready for the unforeseeable circumstances that might hit and shake your entire life including the plans you’ve made.

When you go to an insurance provider and take up an insurance policy, they ask you to pay an insurance premium at a certain interval of time. A lot of questions might bombard your mind, what is premium for insurance?, how does it work? etc.

Here’s all you need to know about insurance premium meaning and its working:

1. What is it?

In simple words, an insurance premium is an amount you need to pay for purchasing an insurance policy. Still, confused? Understand it this way.
The insurance policy is an arrangement made between the insurer and the insured. Just as any other arrangement, an insurance policy has a consideration too. That consideration is known as an insurance premium.
The insurer may ask you to pay the insurance premium at a fixed interval of time which can be monthly, quarterly, half-yearly, etc. This depends upon the policies of the insurance company and the kind of policy you choose.

2. What are the factors that determine the rate of premium?

This is one question that would surely strike your mind when you choose an insurance plan for yourself. Here’s an explanation to make things clear for you.
The rate of premium differs and depends on various factors which include:

• Type of insurance that is opted for.
• Age of the person taking the insurance
• Reputation and capacity of business in case of commercial insurance policies.
• Medical history and lifestyle of the insured.

Insurance companies appoint experts to analyze these factors and determine the risk associated with a policy. Greater risks mean higher premium rates.

3. Types of Insurance premiums

The type of premium charged by the insurance provider depends upon the kind of insurance policy you’ve chosen.
There are broadly 3 different kinds of Insurance premiums:

Level premiums

In this case, the insurer averages out the premiums that the insured might have to pay during the tenure of insurance. The insurer then charges the average amount throughout the period. The amount of premium remains fixed throughout the course of policy. This kind of premium is charged mostly in case of the life insurance policies.

Increasing premiums

This one is for those who do not wish to pay regular premiums and pay less in the initial stages. The premium rate keeps increasing throughout the tenure of the policy.

Decreasing premiums

Such premiums are mostly applicable to the mortgage redemption policy. There’s an interesting fact about this kind of premium, that is the number of premiums keeps decreasing with the decrease in the outstanding loan amount.

Along with the various benefits insurance provides another major advantage is that the insurance premiums are tax-deductible. These benefits are available if policies are taken in the name of yourself, your spouse, or your children. You can also combine various policies to avail the benefits.

Do you know what is the best part? These benefits are available for both public and private sector insurers. Happy insuring!