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How To Do Life Insurance Premium Calculation?

Updated On Apr 26, 2021

While the premium is calculated by the insurer and we are allowed to only accept or reject the offer, thus, it is important to know how the premium is calculated and the key deciding factors involved in its calculation. This gives an idea of the life insurance coverage amount suitable to your family’s future financial needs

Calculation of Life Insurance Premium

The premium you have to pay for a life insurance policy depends on numerous factors, such as age, overall coverage, medical background, gender, lifestyle, and occupation. The premium on the same coverage of life insurance coverage will, however, differ from insurer to insurer. Read to find out the factors to be considered for calculating your premium amount.

Personal Factors (Related to the Insured)

Following are some factors that affect the premium calculation:

1. Age

Young people have a low risk of getting any critical illnesses or life-threatening diseases when compared with older people. Therefore, the premium amount will be low for young people and high for elderly people

2. Family Medical History

If there has been a history of illnesses in the family there are chances that the insured can contract such diseases due to heredity. Hence, life insurance companies will charge a higher premium.

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3. Your Health History

Insurance companies consider your past health history in determining the premium amount. Therefore, if you are hale and healthy and did not have any chronic ailment or fatal/potential health issues in the past, then the premium charged is low

4. Profession

Policyholders working in professions such as shipping, mining industry, fisheries, piloting, oil, and gas, or any other dangerous profession have to pay higher premiums 

5. Smoking and Drinking Habit

Smoking and drinking put the policyholders at higher risk of critical ailments; so, if you are a smoker/heavy consumer of alcohol, this can affect your premium to a great extent. 

6. Gender

Women are believed to live 5 years more than men at the minimum. Therefore, they pay a premium for a longer period however at a lower rate.

7. Lifestyle Choices

Many insurers charge a higher premium for people who love to take risks and involve themselves in risky adventures such as racing cars, skydiving, mountain climbing, or other high-risk activities. 

Also Read:- Can I Make the Payment Now as I Missed the Last Premium of Life Policy?

Insurer Related Factors

Following are some factors that affect the premium calculation:

1. Mortality and Underwriting Process

The underwriting process ascertains your premium for life insurance. Different considerations such as your age, gender, occupation, lifestyle/habits, policy tenure, family medical history, and so on are taken into account in the underwriting process.

The life insurance premium is often measured on an actuarial basis (a quantitative and statistical insurance risk assessment method) that takes into account the likelihood of deaths taking place at particular age levels.

2. Costs

The premiums can vary for life insurance policies because insurers would have distinct cost models, risk assessment, and returns on investment. Operational costs can include office costs, such as the expense of the policy contract, the commission of the insurance agent, and the insurer's other overhead costs. Once the insurer has arrived at the factors for risk cost analysis, to calculate the final premium, they add operating costs along with the expected profit margin.

3. Exigencies

The inclusion of the contingency element in the premium allows insurers to sustain their finances in the event of unexpected or foreseeable circumstances or an unexpectedly large number of claims each year. Contingences include natural or man-made hazards, death claim settlement ratio, regulatory changes, new amendments, failure of a newly released product, etc.

Also Read:- All About SBI Life Insurance Premium Payment


Life insurance premiums are based on several factors, and it can be quite challenging for a few people to understand them. The above factors carry different weights and differ based on several factors. In what way the above factors impact your premium rates depends on the insurer company and the way they treat the above factors and the combination of them.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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