What Happens To The Money I Pay For Term Insurance

Pay For Term Insurance

As a sole earning individual, you have a number of people who are dependent on your income. This could include your parents, your partner, your children, and other family members. To provide them with a financial safety net in your absence, it is imperative for you to invest in term insurance.

When you opt for this policy, the cost of the policy has to be paid in premium. Everyone is aware that premiums keep the policy operational. However, what exactly do the insurance companies do with the premium paid towards the policy? Read on to know more about this.

What is term insurance?

Term insurance is a type of life insurance policy, in which the family of the insured gets compensated by the insurer, if the policyholder passes away during the term of the policy.The insurer compensates your family with a sum assured offered in the policy. This amount can help them stay protected from different life risks and live a financially secure life.

What are the deciding factors behind the premium?

The following are the factors that decide your term insurance premium:

  1. Age

Your age plays a massive factor in deciding what you will pay for the policy. When you purchase your policy at a younger age, the premium of the policy is much lower. This is because you do not tend to develop lifelong illnesses at a young age, and you are considerably fit and immune to diseases at a young age. However, if you were to purchase the policy at a later stage of life, the cost of the policy will be higher as it would cost your insurer more when it comes to compensation.

  1. Medical history
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At the time of the purchase of your policy, you are required to go through medical tests. This helps the insurer in getting a clear picture of your medical fitness. If you do not have any diseases, you will not be required to pay a higher premium. However, if any medical condition is detected during the test, or if you have a pre-existing medical condition, your premium could escalate.

  1. Occupation

Your profession also decides your term insurance premium. People who have desk jobs with  lower risks and a lower accident factor have reduced premiums. On the other hand, people who work at places such as construction sites, chemical plants, or in manufacturing factories are required to pay a higher premium. This is because of the higher risk of accidents or disasters at such places.

  1. Lifestyle

The lifestyle of a potential policyholder is considered when deciding the premium of their policy. If you are a smoker or drinker, the insurer will charge you more for the policy. As it would cost the insurer more when the claim is filed, they will charge you a higher premium for the policy. If you live a normal lifestyle, your premium would be lower due to your higher life expectancy.

How is the premium utilised?

The premium that policyholders pay for their policies is pooled together by the insurance company. This money is used for investment in low-risk markets such as debt markets and liquid markets. Interest and returns are earned from this investment by the insurance company. If you file a claim, the money that is paid to you in compensation is either paid from the returns or from the investment pool. At times when there are excessive returns gained by the insurer, they will keep this extra profit for themselves.

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This is a general idea of how the premium of your insurance gets utilised by the insurer. Not only does it earn them good profits, but it is also used to pay compensation based on your claim. If you are interested in purchasing the policy for yourself and your loved ones, you can use the term plan calculator. This calculator gives you an idea about how much your premium would be based on your requirements.

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