Understanding Insurance Premiums: How Does It Work?

Depending on the terms of payment you’ve chosen, you can think of your insurance premium as a bill that comes every month, quarter, or year. In other cases, an insurer may require a one-time payment for your policy.

But what are premiums in insurance? Simply put, the premium is the money you pay for your insurance policy.

As with any expense, understanding insurance premiums are necessary in knowing how your policy can help protect your life and well-being, as well as that of your family. This infographic will be a crash course on premiums in life insurance, covering topics like what insurance premiums mean, getting a quote, pricing factors, risk assessment, and more.

How Do I Get an Insurance Premium Quote?

When calculating premiums, insurance companies look at several data points to arrive at a reasonable cost for your policy, making sure that it works both ways. On the one hand, premiums should be enough to pay potential claims, while on the other, the company has to make sure that it can make money for its insurance business from those premiums.

Usually, insurance premiums have a base calculation, and the insurance company may apply discounts to the base premium to reduce your cost based on the information you provide to them.

After collating your personal information, documentary requirements, and results of applicable medical examinations, the company makes an assessment of acceptable and insurable risks to cover in your life insurance. Once your provider presents the quote, take the time to discuss the extent of coverage and all the other terms and conditions of your policy, so you know exactly how your insurance can work for you. 

5 Factors that Affect Insurance Premium Pricing

One of the principles of insurance is that the risks to insure someone or something should not be higher than the payment to be made in the future to the insured or his/her beneficiaries. As such, bancassurance insurers consider a wide variety of factors when pricing premiums. Here are some of the most important.

1.  Age

Arguably, age is the most critical factor in determining your insurance premium. Getting an insurance policy while you’re young means paying lower premiums because the assumption is that you’re still several years away from claiming benefits. During your young adult years, you’re most likely to be in the prime of your health, which can lower your insurance cost.

2.  Gender

Women may be offered lower life insurance premiums than men because, statistically speaking, women tend to outlive men by five years on average; thus, they pay premiums for a longer time.

When it comes to medical insurance, it’s the other way around—women are considered riskier to insure than men because they usually incur more doctor visits, not to mention that they may require maternity benefits on top of their medical insurance.

3.  Lifestyle

Your lifestyle also plays a vital role in getting you affordable premium rates. In this category, everything from your hobbies to your daily routine and health habits are added into the equation to help your insurer determine your risk level as a policyholder.

For example, if you’re into extreme sports, you can expect to pay higher premiums than if you’re an enthusiast of less dangerous sports. Being a smoker or non-smoker is also a major concern to your insurance provider, so consider avoiding the habit to fetch the best rates for your premium.

4.  Family medical history

Aside from your health being dependent on your lifestyle choices, genetics may also determine how healthy you are or otherwise. If genetic medical conditions are present within the family, it could mean that you’re also prone to these ailments.

For example, if you’re a woman whose mother or female sibling has had breast cancer, you may also be at risk even if you’re generally conscious about your health and lifestyle. For males, having a history of critical illnesses such as heart attack or prostate cancer is considered a risk factor, too.

Consequently, these health issues can affect the insurance premium your provider will collect from you.

5.  Occupation

If your job entails working in service-oriented industries with a lot of customer-facing interactions or operating heavy machinery as an overseas Filipino worker (OFW), the level of stress or danger you get exposed to may bring up some red flags for your insurance provider. 

Your application can be approved, but you have to be ready to pay higher premiums than those working in less stressful or risky conditions.

FAQs about Insurance Premiums

Insurance premiums become easier to understand when you have a basic understanding of important concepts like the ones listed below.

Q: What does the insurance company do with my premium?

A: The premium is included in the insurer’s funds or capital, which will become your insurance payment in the future. This is where the company will draw funds when you take out your policy or when the time comes to pay death benefits to your designated beneficiary. For variable life insurance (VUL), part of your premium may be invested to increase the value of your insurance’s cash component.

Q: Is my monthly premium enough to cover my entire policy?

A: Yes, you don’t have to worry about paying premium after premium and then end up not getting paid in claims. Even though a big part of insurance coverage depends on the insurance company’s financial capabilities, policyholders like yourself are protected under a law that will enable you to make and receive claims as long as the policy’s terms and conditions are upheld.

Q: Will my insurance premium change?

A: Premiums rarely change within any given year or term, but certain scenarios may provide some exceptions. For instance, converting your term life insurance, which lasts only for a specific number of years, to a permanent one will cost you more.

Another situation that may cause changes in your premium includes policy renewal. Perhaps the cost of doing business in the insurance industry has gone up at the time of renewal, and you might pay a higher premium the next time around.

Q: What happens if I fail to pay my insurance premium?

A: The solution depends on the type of insurance you have. For term insurance, you’re entitled to a grace period during which you can make payments for those you’ve missed. The goal is to bring your account back to good standing, so you don’t lose your coverage.

For whole life or permanent life insurance, your insurer will automatically tap into your policy’s cash or investment value and use it toward missed payments. This means you don’t have to pay any late fees or penalties.

Insurance and Insurance Premiums

Life insurance can offer optimum value to you as the policyholder. Through your premium, you can receive life protection and investment benefits.

BPI AIA's life insurance with investment provides utmost coverage at the lowest rates possible, making it easy for you to get a policy. To keep you safe amidst the COVID-19 situation, appointments with our Bancassurance Sales Executives can be conducted virtually. You can get an estimate of the insurance premiums of any of our products while shopping for the most suitable life insurance.