As a contract between the insurance company and the insured, these life insurance plans contain a valid consideration to be enforceable by law. Paying off premiums forms the base of the contract, which makes it complete.
The decision to choose a policy is often influenced by the premium rates and the affordability of the plan. However, we ought to not sacrifice the policy coverage to save on insurance premium payments.
Bringing that compromise would defeat the purpose of the insurance plan, which is to secure financial security for our loved ones when we are gone. Financial risk management requires the use of life insurance.
Regardless, two people of the same age living in different locations will be offered a different level of coverage or a different premium if they have different medical conditions and income-earning capacities.
It is advantageous to purchase a life insurance policy at a young age, such as 28 or 30. Life insurance plans that are purchased at a young age are cost-effective. The more you age, the more responsibilities you face, and, at that stage, a life insurance policy becomes a necessity and, due to the increased age, the premium increases.
Do life insurance premiums come in different types? How often do you have to make premium payments? What are the rules concerning tax benefits for life insurance premiums paid in your name or the name of specified family members? You should know these basic rules.
Discounts Offered On Life Insurance Premiums
Many insurance companies offer discounts on premium rates depending upon the sum assured and the modes of premium payment. This is precisely what the term rebates means.
1. Rebate for periodicity of premium
Insurance policies usually require periodic premium payments, and depending on one’s cash flow, annual, semiannual, quarterly, or monthly payment schedules can be chosen. If the company collects premiums more frequently, the costs of handling them (collection, processing, and administrative expenses) tend to increase.
The company has access to the funds longer (for investment) if the premium is paid at once for the entire year as opposed to monthly. The company can use those funds for investing and offer you cheaper rates.
2. Rebate for online payment
In general, the company’s servicing cost for online premium payments is lower than for physical payments. Also, the company saves money by not paying agents’ commissions when physical policies are sold.
Accordingly, various companies may already have given a rebate before quoting the rates for online premium payments. The premium rates quoted should already include the rebate, else the rebates offered will be higher than those offered with a physical payment.
3. Extra Premium
The normal premium tables apply to people whose lives have no additional risk, which is known as ‘standard lives’ in the insurance industry. Ordinary premium rates apply to people with standard lives. Occasionally, the insurer may charge extra premiums for people with health issues such as diabetes or heart disease or who work in hazardous occupations.
Additionally, insurance covers are also charged extra if they are purchased alongside the base policy (known as ‘Add Ons’ in insurance jargon).
4. Level premium
The term level premium describes insurance policies in which the premium remains the same throughout the contract. In this case, the premium level is guaranteed and the company cannot change it at a later date.
In most cases, life insurance plans, except for life insurance plans that pay level premiums, this is advantageous to the life assured and the insurance company. The term level premium describes insurance policies in which the premium remains the same throughout the contract.
Here, the company is guaranteed to keep premium levels and cannot change them at a later date. Both the life assured and the insurance company benefit from the level premium payment process, and thus most life insurance plans, except for some term insurance plans, are level premium payment plans.
5. Increasing and decreasing premium
Term plans with increasing premiums (as explained above) are typical examples. An increasing premium applies to mortgage redemption policies in which the premium drops as the policy holder’s outstanding loan balance decreases.
6. Single premium
Single premium policies are typically only available to people with higher incomes or who have idle funds.
7. Non-payment and late payment
A “grace period” is usually outlined in most policy contracts, which allows the policyholder an extension to pay the premium after the due date. The policy will continue to be in effect during this period if he pays the premiums without incurring any additional fees.
If your life insurance policy is for something other than term insurance, the grace period for monthly payments is generally 15 days, and for other frequencies of payments (quarterly, half-yearly, yearly) it will be one month but not less than 30 days. Term insurance policies usually have a grace period of 15 days.
8. Tax Benefits on Premiums
Tax-deductible life insurance premiums paid by the policyholders for themselves, their spouses, or their children may be deducted from taxable income under section 80C of the Income Tax Act. Section 80C can’t be applied to premiums paid for policies owned by other third parties (other than a spouse or children) such as parents (fathers, mothers, or both) or in-laws. These are not applicable as a new tax slab taxpayer.
Final Words
The purpose of this article is to help people understand how premiums lead to better returns in long run. Instead of being frustrated as you pay premiums or your life insurance plans, you switch your mindset into a positive one by understanding that the money paid as a premium is not wasted. It will bring countless benefits for you in the years to come.
