Today I want share with you basic knowledge about how your life insurance premium is calculated. I am mainly concentrating on Pure Risk Plans like Term Insurance. Premium is the payment made by you to Insurance company to cover your life risk. It consists of two factors. One is Pure Premium, which is the actual cost of the risk Insurance companies taking and another is Gross Premium which includes Pure Premium+Expenses. Pure Premium depends on the mortality table they are using. Each company follow their own mortality table. Expenses too differ from company to company. That is the reason you will find the difference of Premium for the same age, SA and tenure.
MORTALITY TABLE: Mortality table shows the probability of living or dying at any given age. With this table insurance company can assume probability of death for any particular age. Insurance companies construct these tables based on census data which includes birth and death rates and on their own experience or based on industry experience. Below is the sample of Mortality Table. Rate of below mortality is per 1000 people.
Now you may ask by reviewing the above sample mortality table that, how the insurance premium is fixed for the whole tenure of policy when in Mortality Table for each age group probability of death is different. What they will do is, during the initial period of your Insurance they will build up the reserve as probability of loosing life is low and use that amount in later years.From the above table I will show you the simple way how premium can be calculated. Suppose insurance company need to issue 1,00,000 polices for the age group of 10 yr old female. Then from the above table you can notice that for each 1,000 people of the age group of 10 yr female, probability of loosing life is 0.70. So for 1,00,000 people probability of loosing life is 70 (1,00,000*0.70/1,000). Suppose all 1,00,000 policies are insured for Sum Assured of 1,00,000 then they need to pay for death claim of 70 people is Rs. 70,00,000 (1,00,000*70). What they will do is, they will collect this 70,00,000 from the 1,00,000 insured persons. So pure premium will be Rs.70 for those 1,00,000 insured female lives of age group 10.
MORBIDITY TABLE: It is the table which shows the probability of male or female life either contracting a critical illness or disability at any given age.
So from using above two tables insurers usually construct the premium for your life insurance. Other things that may affect your premium are rider you opt during purchasing policies and underwirter’s decision.
Hope I made it as simple as possible for you to understand the basic knowledge about Premium Calculation of your Life Insurance.