The insurance sector has remained one of the most complex sectors in India regarding understanding.

Understanding the basics of the industry has stayed at wit’s end for the generic lot, let aside the in-depth knowledge. However, the complexity levels don’t prevent anyone to opt from insurance and every second person owns insurance in some manner.

One of the primary reasons why people are not aware of the subject matter is the lack of interest of ordinary individuals to dive into details.

In this blog, we seek to discuss one of the most common aspects of the sector, i.e., the premium. We shall explain the premium in detail, its types, how it is determined, factors affecting premium and many more.

Read on!

What Is an Insurance Premium?

In the simplest form, the insurance premium is the cost of insurance policy. It is the amount you pay to the insurer in
exchange of which you get the policy to cover your risk.

The insurance policy should be chosen based on the coverage and policy period — for example, term insurance plan, annuity plan, or mediclaim.

But the primary factor that helps you zero in on the choice of policy is the premium amount that you have to pay for the policy.

What Factors Affect Insurance Premium?

An insurance agent always asks for personal information before giving you the options of insurance policy.

The information sought include:

  • Age
  • Location
  • Habits
  • Daily commute
  • Annual income
  • Family size

In current times, with improving technology including data science, the companies are making use of the scoring system. In this system, a score is computed based on personal information.

Then based on the score, a personalized plan is curated along with the premium value.

Types of Coverage

If you add more coverage to your insurance plan, the premium amount increases.

For example, assume you decide to buy a term insurance policy. Now, if you choose to increase the policy period, you will have to pay a higher premium.

Amount of Coverage

Sum assured or coverage is by far one of the most known terms in the insurance sector.

Coverage is one of the first things that comes to mind whenever the topic of insurance comes up. The relation between sum-assured and premium is simple.

Higher is the amount of cover; more is the premium without any adjustment in other aspects of the insurance coverage.

Types of Insurance Premiums

While purchasing insurance for any purpose, you get an option if you want to pay a fixed premium till the end of policy period or you want to pay flexibly. Thus, the following are the two types of insurance premiums:

1.Level Premium

Level Premium is the simplest form of premium in which a policyholder makes fixed payments till the end of the policy maturity period.

2. Flexible Premium

Flexible premium is complicated when compared to the level premium option.

In this option, policy hold gets the option to make changes in an insurance policy in the future such as changing the face amount, change in the number of people covered in term insurance, change in sum assured, etc.

According to the modifications made in the policy, the premium amount varies.

Factors that Impact premium (based on different policies)

1.Life Insurance Premium

What factors affect life insurance

Life insurance policies provide coverage against the death of the policyholder or any mishap to the family of the policyholder.

The factors that impact the premium value for life insurance policies include the age of the insured, his/her annual income, assets owned by him/her, his/her liabilities, and health condition.

The simplest form of life insurance is term insurance that covers the risk but does not provide any savings benefit at all. Thus, the duration is the key to life insurance. Earlier you start, lower will be your premium amount.

2.Health Insurance


Health insurance plans cover medical expenses, hospitalization, illness treatment, surgeries of the insured. Also, some of the health insurance plans include regular free medical checkups.

Thus, the factor that impacts the insurance premium is age. Higher the age; higher will be the premium for the health insurance plan.

Other factors that are important include existing health conditions, family size, income and type of coverage.

3.Car Insurance

Car insurance in simple words is of two types – third-party and comprehensive.

The third-party insurance is the primary form and is mandatory by the regulator. On the other hand, comprehensive insurance provides coverage to you and your car.

Factors that impact the premium of car insurance includes car model, daily commute, car condition, the age of the driver, Anti-theft gadgets installed in your car, etc.

Modes of Paying the Premium

Insurance premium can be paid using multiple methods and in multiple manners. Following are the different manners of payment:

  • Monthly

Premium payment is made every month. The amount in the category is least and affordable. However, the downside of the option is that the policy would cost you more in this way.

  • Quarterly

In this mode, you make four payments every year. The premium amount every quarter is average regarding affordability and the total policy amount is lesser than the monthly plan.

  • Semi-annually

In this case, you make two payments in a year.

One, every six months.

The cost of the policy would be higher than an annual plan, but lesser than monthly and quarterly plan.

However, the payout amount at every frequency is higher than the quarterly and monthly payout value. Thus, affordability could be a concern for middle-class individuals.

  • Annually

Under this mode, the premium is paid once every year. Thus, the payout is highest, and affordability remains a concern for  middle-class families. However, the cost of the policy is cheapest of all the modes.

Thus, if you observe carefully, you will see that the premium is inversely related to payments every year.

Disclaimer: The views expressed in this post are that of the author and not those of Groww