5 important facts your insurance agent won't tell you

Let’s all face it. No one really likes to think about life insurance. However, responsible people with a family to provide for and assets to protect, cannot overlook its importance.

Having a life insurance plan has become very important. At the same time, life insurance is not a subject that is easy to understand. It involves so many decision points which can be downright overwhelming.  Given the different types of plans available, how do you know which one is right for you? Or how much insurance coverage you actually need? In fact, not just this, life insurance is a language in its own.

Words like beneficiary, riders, premiums and underwriting come up frequently when you're shopping for coverage. And after a while the terms can start running together. Being fluent in life insurance requires some patience, but if there is one term to get extra familiar, it’s 'premium.' This word is important because it has everything to do with what you'll pay to keep your coverage in place.

Basic knowledge of premiums is necessary to be able to choose and maintain your life insurance policy without putting your monthly budget at risk.

1. What is life insurance premium?

To put it simply, life insurance premium is a payment made to the life insurance company in exchange for your coverage. It is defined as the fixed amount paid by the life assured at regular intervals or limited period or just once to the insurance company for the sum assured (opted by the life insured at the time of buying insurance policy).

The premiums are dependent on various factors like life insurance plan opted, the age of the life assured, the sum assured opted, premium payment terms and mode. Premium is required to be paid in advance and can be paid via cash up to Rs 50,000, (the limit set by IRDA for cash payments) cheque or DD. Further, most insurance companies have provided for payment of premium online. At times insurance companies also offer discount of the premium rate based on the sum assured. These discounts are known as rebates.

2. Rebates on periodicity of premiums

In case of periodic premium payment policies one can normally choose to pay premium annually, half yearly, quarterly or monthly depending on one’s cash flow situation. The only thing that you need to keep in mind is that as the frequency of premium payments increase, the cost of servicing rises as well. Remember, the annual premium-paying option is cheaper than a monthly premium paying option.

Choosing lower periodicity for life insurance premium payment helps in lowering processing costs associated with collection of premium of the life insurance policy. As a result, the company has to bear less servicing cost where such savings are directly offered as rebates to the customers. Also, paying annual premium helps to cut down on policy costs as annual payments have better rates than monthly payments. You can actually save up to 7 to 9 % in total costs when you pay annually instead of monthly!

3. Rebates for online payment

The insurance companies incur a certain servicing cost every time you pay the premium; the servicing costs for premiums which are paid online are lower than for those paid physically. Additionally, the company also saves on commissions generally paid to agents in case of physically sold policies. Therefore, varying from company to company, rebate may have already been given before the online premium payment rates are quoted.

Consequently, the premium rates quoted would already include the rebate, else the rebates offered may be higher than those offered for physical payment.

4. Level Premiums

As the name suggests, level premiums stay the same throughout the policy term. Usually in many term policies the insurer averages out the premium chargeable over the entire policy period and the average premium is charged as a level premium throughout the policy tenure.

In this case premium level is guaranteed and cannot be changed by the company at a later date. This is advantageous for both the life assured and the insurance company and therefore most life insurance plans except some term insurance plans involves level premium payments. Another most important benefit of level premiums is for the young people as younger applicants have access to lower life insurance rates because the younger you are, the less you are likely to die unexpectedly. Of course, you can’t control how old you are, but you can control how soon you buy your coverage.

If you purchase a term life insurance policy at an early age you are eligible for lower insurance rates which remains the same throughout the term of your policy, even if it lasts for 30 years. For example, a 30-year-old man in excellent health can get Rs 1 crore policy covered till 40 years, by just paying monthly premium of Rs 800 to 1,000. And the cherry on the top is that the premium will remain same till the policy period. However, a 40-year old man in excellent health would pay Rs 1500-1800 a month for the same coverage. The premium difference of Rs 700 to 800 premium when added throughout the life of the policy will create a bigger difference.

5. Tax benefit on premium payment

Almost all the life insurance policies offered by LIC of India provides tax benefit on the premium paid under section 80C of the Income Tax Act 1961. In case if you own more than one life insurance policy and you pay the premium for several policies then all the premiums can be included for tax exemption.

This acts as a major benefit as the insurance holder can save a bundle on their taxes with the help of tax deduction. However, the deduction is applicable only for the premium you pay for the policy taken towards protecting yourself, your spouse and your children. If you're paying the premium for third parties like your parents or parents-in-law, those payments are not eligible for tax deductions.

Source: Rediff.com