What is an Insurance Premium

What is an Insurance Premium: The Insurance Premium is calculated on the basis of assumptions relating to future experiences on mortality, interest rates and expenses. These assumption are based on the insurer's own experience in the past and therefore, not arbitrary. Yet, they are assumptions as far as the likely future experience is concerned. The margin for contingencies is provided because of the uncertainty that these assumptions will turn out to be valid, as the future unfolds.

Level Premiums

        If it is expected that out of 10,000 persons at a specified age, the probability is that one may die within one year, the mortality rate at that age is said to be 0.01%. The Risk Premium  chargeable  for persons at that age would be Rs 0.01 per Rs. 1,000 SA. If a policy has a term of 20 years, the risk premium and therefore, the Insurance Premium charged would vary for each of 20 years. It would be increasing steadily from year to year. It would be difficult to administer annual changes in a continuing contract. A part from that, the Insurance Premium at later ages, towards the end of the policy term, would be very high and people may find it beyond their ability to pay. 

         They will then be without the protection of insurance at times when they need it most. To offset this problem, insurers spread the Risk Premium  on a uniform basis, throughout the term of the policy. The Insurance Premium  remains constant for 20 years. Such uniform premium is called Level Premium. This implies that the Insurance Premium collected would be more than necessary for the risk in the early ages, and less than necessary towards the latter part of the policy.

Office Premium

          The premium figures arrived at after loading the Net Premium or Pure Premium, is called the Office Premium. They are now ready for use. The Insurance premium figures printed in the promotional literature and brochures and Office Premium. They are also referred to as the Tabular Premium.

Extra Premiums

          Extra Premiums may be charged on any particular policy.. This may happen because of the grant of some benefit in addition to the basic benefits under the plan, like accident benefit or premium waiver benefit. Riders provide additional or supplementary benefits. Extra Premium may become chargeable because of decisions relating to the extent of risk in any particular case. If the risk of the person to be insured is assessed as more than normal, because of healthy or because of occupation or habits, insurers may charge Extra Premium. These are usually stated as say, Rs.2 per thousand, and will be added to the Insurance Premium otherwise chargeable.