Be Your Own Boss. Learn How To Calculate Term Insurance Premium Before Buying

Be Your Own Boss. Learn How To Calculate Term Insurance Premium Before Buying

As you may already know, a life insurance policy is  a contract between you and the insurer. The contract can only be stated valid when a premium amount is paid by you at the time of purchasing the policy, and at regular progressions of your policy tenure.  

The amount of these premiums that you’re required to pay towards the policy are calculated based on several unique factors such as age, medical history, job, lifestyle, and your chosen total coverage. It’s very normal to see varying premium rates for the same policy from insurer to insurer.

If you’re wondering what’s the reason behind such fluctuations, and want to know how the insurance premiums are calculated by insurance companies, make sure you read on to find out all the answers.


How To Calculate Term Insurance Premiums?

Life insurance acts as a way to provide a stable lifestyle to your family in the event of your demise. A fixed amount as stated in the policy term is paid to your chosen nominee in case you die in between your policy tenure.

With that said, the premiums you pay are used to accumulate the corpus of money offered to you in the future. This means the longer you’re likely to live, the lower your premium rates will be. However, that’s not the only factor based on which this amount is calculated.

To calculate term insurance premiums, there are three important steps followed by almost every insurer. Based on your observations for the following steps, you can easily calculate the premium rates of your term insurance policy:

  • Underwriting and Mortality Process

Life insurance premiums are greatly dependent on the underwriting process as it considers several factors such as your gender, age, occupation, lifestyle, family medical history, existing medical condition, and so on.

This information is required to determine how much risk of death you’re carrying with your current lifestyle. Once this process is completed, you’re categorized differently by insurers based on your risk profile, which is then used as one of the various elements to calculate your insurance premiums.

Additionally, there’s also a method based on statistics and mathematics to determine your life risk, which calculates the probability of death that may occur at specific levels of your life. However, there is no standard formula ever developed to know when a person will die.

That’s why the insurance company requires you to undergo an underwriting process and offers you a premium rate accordingly. As a general rule of thumb, the premium rate will be lower for a youngster, whereas it will be high for an aged person.

  • Margins of Profit and Expenses

The reason why premium amounts vary from insurer to insurer is that the premium rates are not only dependent on factors associated with you, but also the factors involved with the insurer. This includes the expenses managed by the insurer to write the policy.

Moreover, as different term insurance policies across multiple insurers may carry a different cost structure and assessment of investment returns and risk, the outcomes are destined to be different even when the primary factors are the same.

Generally, a lot of people never take the expenses incurred for the policy when calculating term insurance premiums. However, you must also include operational costs to make your premium rates calculation much more accurate.

Talking about the operational costs, they may include expenses such as the commission of insurance agent, cost of policy documentation, and various other overhead expenses of the company. After assessing your risk cost, these expenses are added to the premium rates.

In a nutshell, you should know that the profits made by the insurance companies can have a major impact on your insurance premium rates, and they should be considered while doing calculations on your own.

Check This AlsoPoints to Consider Before Buying a Term Insurance Policy in India

  • Exigency Factors

As you have read above, several different factors are used to determine the premium rates required for your policy. One such element that makes a minor contribution to the finalized premium amount is contingency charges.

Although it does not make a major change in the policy and can be easily managed by the policyholder, the insurance companies surely make a benefit out of it. In the event of any unforeseeable event that leads to a large number of claims, the contingency charges may be helpful.

In such a case, the contingency factor is spread equally among the various claims, which allows the insurance company to manage its finances properly. These unnoticed events may include changes in laws and regulations, failure of a product, artificial perils, and many more.

Therefore, in this way, the contingency charges also hold an important value for the financial stability of an insurance company and also contribute to your term insurance premium calculation process.

A lot of people seem to ignore this factor and end up with a hypothetical figure, which is nowhere close to the actual premium rate that the policy offers you. So, make sure that you include this element while calculating your insurance premiums.

Summing Up

There are several different types of insurance providers available in India that may offer you varying premium rates for a particular plan. However, you should not consider shortlisting a policy only based on the premium rates.

It is considered that when you have a variety of choices available in terms of insurance, you should start the shortlisting process through the claim-settlement ratio of the various companies. A higher ratio will increase your nominee’s chances of getting the claim approved.


Additionally, you should also keep various other factors in mind. If you’ve already conducted the background research and are looking for a term insurance calculator to calculate the premiums for your preferred plan, the steps listed above may prove to be helpful.


Therefore, make sure you consider the things listed in this article and make a better estimation of your required premium rates. In this way, you’ll also be able to manage your finances in a better way, to gain the most out of your insurance policy.