You might be well aware of the term “premium’. If not then, premium is the price which is paid to buy the policy. Also, it is the premium which actually makes the insurance contract complete. But there is still life insurance premium related aspects which are not well understood like types of insurance premiums, premium payment frequency etc. or even the things you will do in case you forget to pay on time. Are you aware of the tax benefits available only on premium pays for life insurance premium policies in your name or in the name of specified relatives? It is important for any individual to know the basic knowledge so he will be able to choose and maintain your life insurance policy.
What does insurance premium exactly mean?
An insurance premium is counted as the premium per thousand rupees of sum assured and is illustrated in the form of tables of premium rates by insurance companies. The premium varies across insurance plans, policy terms, sum assured and the age of.
Following are the 10 things you must know before paying life insurance premium :
- Payment scheme of Insurance Scheme
Premium is required to be paid in advance and can be paid via cash up to Rs 50,000 cheque or DD. This limit of an amount is set by the IRDA for cash payments. Further, for the easy transactions, Most of the insurance companies make the process easy for the customers by allowing the online payments.
- Discounts offered at premium rate
At times insurance companies also offer discount on the premium rate based on the sum assured. These discounts are known as rebates. Usually, the companies offer rebates on policies with higher sum assured. Servicing policies remain same for all the different types of policies, a higher sum assured means that the cost of servicing per unit of the sum assured is lower. This, in turn, translates into higher profits for each unit of the premium paid.
- Rebate for sum assured
As already discussed at above point, rebates are the discounts offered on the premium rate. Most of the companies offer rebate for higher sum assured i.e. Sum assured. It happens because the cost of servicing of all policies of the same type being almost the same, a higher SA means lower servicing cost per unit SA which ultimately translates to higher profits/returns per unit of SA or per unit of premium paid for the company.
- Rebate for periodicity of premiums
Depending upon your cash flow, you can choose to pay the premium monthly,quarterly, half yearly or annually. Higher the cost of servicing, higher he frequency. The funds remain with the company for longer period of time if the premium is paid at one go for the whole year compare to the monthly payment. Therefore, premium at one go, insurance company can earn higher returns.
- Rebates Are Offered On Online Payment
A company’s servicing cost for premiums paid online is normally lower than for those paid physically. Company can also save on commissions generally paid to agents in case of physically sold policies. It varies from company to company, rebate may have already been given before the online life insurance premium payment rates are quoted. Consequently, the premium rates quoted would already include the rebate.
- Extra Premium Is Charged In Some Cases
For people who do not carry additional risk, the ordinary premium rates are applicable. However, in case of the people who carry extra risk, such as health problems like heart disease or diabetes the insurance company may charge extra premium. At times extra premium is charged when the policyholder is involved in a hazardous occupation. When the insured opts for additional riders with the base policy extra premium is charged.
- Increasing and decreasing life insurance premium
A typical example of increasing premiums is the term plan with the increased premium.
Decreasing premium is applicable in mortgage redemption policies where the premium goes down with the decrease in the policy holder’s outstanding loan amount.
- Tax benefit available only for premium paid for specified persons
Under Section 80C of the Income Tax Act, any amount paid by a policyholder towards life insurance premium for self, spouse or his/her children can be claimed as deduction from taxable income. Premium paid for policies in the name of any other third party (other than spouse or children) such as parents (father / mother / both) or in-laws is not eligible for deduction under section 80C. All the premiums can be included, If a person is paying premium for more than one insurance policy,
- Extra premium
People who don’t carry any additional risk or standard lives in insurance parlance are those for whom normal premium tables are made. The ordinary premium rates are applied in case of standard life. However, in case of people who carry extra risk because they suffer from health problems such as diabetes or heart disease or work in hazardous occupation the insurer may charge an extra premium.
- Level premium
A premium which is charged under a policy remains the same throughout the duration of the contract, it is called level premium. In this case, premium level is guaranteed and cannot be changed by the company at a later date. It will not only benefit to the life assured but also to the insurance company and therefore most life insurance plans except some term insurance plans involve level premium payment.