Premium in life insurance is the amount that must be paid to the insurer or insurance company for an insurance policy. This premium must be paid regularly for the policy to be in force; not doing so may result in the cancellation or loss of coverage.
Premiums are determined by age, type of plan, riders, amount of coverage, sex or gender, and the policy fee. This affects the calculations of the premium in the life insurance policy.
There are different types of premiums: natural, level, single, graduated, modified, and fractional premiums.
Natural Premium
This type of premium increases every year, including the rise in the rate of mortality. The reason for the premium increase is the increase in the age of the insured. Natural premium becomes expensive year after year. Thus there is a possibility for this premium to be discontinued in a later year. The calculation for this premium is straightforward by using the mortality table and age. Mortality Table is also known as the life table.
Level Premium
The amount to be paid for this type of premium is at a constant level. This means that the premium paid throughout the effectiveness of the policy is the same amount every year. Age does not affect the amount of premium every year. This type of premium is practical for those who want to avail of the policy. The scientific method is used in calculating the premium.
Single-Premium
This is a one-time payment of premium. This is a lump-sum payment of the premium, but the protection is a lifetime until the insured dies. The calculation of this premium depends on age, health, and the coverage of the death benefit. This is advantageous for those who do not want to pay a premium on a monthly, quarterly, or yearly basis. There is no lapsing of the policy because of discontinued payment of premiums because all the premiums have been paid one time.
Graduated Premium
This type of premium increases every year, but when the policy reaches the 5th year, the premiums remain on that level of payment until the paying period, but the face amount is constant. This tends to be more expensive than any other premiums.
Modified Premium
This premium is a constant payment from the first years of the policy. It increases in the 5th year or 10th year of the policy and remains on that level throughout the paying period. The increase made is only once.
Fractional Premium
This type of premium is a proportionate share of the annual premium. This is computed with the yearly premium multiplied by the conversion factor. Since the yearly premium is calculated with a conversion factor, this tends to be more expensive than paying the premium annually.
After knowing all types of premiums in life insurance, choose the type of premiums that fit you best and assess these types of premiums that will be beneficial and cheaper before buying a life insurance policy.
