How is Term Insurance Premium Calculated?

Term insurance is a contract between an insurance provider and you (the policyholder). In a term plan, an insurance provider promises to provide financial security to your family in case of unfortunate eventualities in exchange of the premiums paid by you.

Life is never certain and a poorly constructed financial plan can lead to consequences on one’s dependents. Did this thought ever cross your mind about how your family/dependents would deal with any debt left by you, if something happens to you?

Hence, ensuring the financial protection of your family should be your utmost priority. And, a term insurance plan helps you achieve this goal in the best and the simplest way.  Therefore, one must never underestimate the effect of adding a term insurance plan in your financial portfolio. It not only works as an income replacement tool, but also helps your loved ones being financially independent even in your absence.

But, the most important question is how much premium amount would you actually need to pay in return of the sum assured you are looking for?

In this article, we will discuss the criteria required for calculating term insurance premium:

Premiums rates for term insurance are basically determined by the underwriting department of an insurance company using statistics and mathematical calculations. While calculating the premium for a term insurance plan, the risk factor plays a pivotal role in determining the sum assured for an applicant. The lower the risk involved in an application, the lower the chances of a claim arising from the insured and hence, lower the premium would be for the applicant.

Here’s a look into the criteria determining the premium rate for a term insurance plan:

  1. Age: 

Age is the first and foremost factor to decide your premium amount. The more your age, the more your premium amount will be. This is because your age poses higher risk to insurers as higher age normally leads to declining and chances of occurrence of the insured events are much higher. As the premium amount tends to increase with age, buying a term insurance plan at an early age is always suggested. For instance, you can buy a policy with SBI term insurance for at an age of as early as 18 years.

  • Gender:

There are many scientific researches that support the fact that female gender on an average live five years longer than that. Hence, the insurance companies feel that insuring female lives is less risky than insuring male lives. Due to this reason, premium amount charged for female insured is comparatively less than a male insured.

  • Occupation: 

Your occupation also plays a pivotal role in determining your premium. There are certain occupations that are thought as high risk compared to other profiles such as occupations of pilots, soldiers, miners, fishermen, off-shore gas or oil industry workers, etc. This is also a reason that people working in jobs of teachers, desk jobs, etc. pay lower premium amount compared to others.

  • Geographical Location: 

The vicinity where you stay also plays an important role in deciding your premium mount for a term plan. In case you live in a locality which is more prone to disaster or natural calamities like tsunami, earthquakes, hurricane, etc. you may end up paying higher premium as compared to the individuals residing in safer areas.

  • Height & Weight: 

Your height and weight help the insurance providers to decide whether you’ve a healthy body mass index or not. Having an improper body mass index makes you more likely to suffer from weight-related medical issues like heart disease, breathing problems or diabetes. This eventually lead to higher premium rates.

  • Alcohol Consumption: 

Excess of anything is bad. Likewise, consumption of alcohol more than recommended on regular basis can result in alcohol related health issues and ultimately affect your life span.  Due to this, insurance companies charge higher premiums to the individuals who have higher alcohol consumption.

  • Medical History:

Your medical history also affects your premium rate. In case you have suffered from any severe illnesses in past or are currently suffering from one, it will again increase your premium amount. If there is an individual who has suffered from cancer, most of the insurance companieswon’t offer you ta term plan at all. However, if the individual hasn’t shown any sign of relapse for at least a period of 5 years, his case can be considered by the insurance companies.

  • Family Medical History: 

In case any of your immediate blood relations like your mother, father, sister, brother have suffered from or been contracted with any life threatening illnesses, their medical condition can also affect your premium rate. This is done due to the reason that the insurers feel that it increases the probability of you suffering from any such life-threatening diseases being you may also get affected with the same at a later stage in life.

  • Sports & Hobbies: 

If you love adventure sports or have hobbies that involve high-risk such as skiing, motorsports, sky diving, rock climbing, or horse riding – the chances of you meeting an accident is always higher as compared to other people. Taking part in such adventure sports or dangerous hobbies can significantly increase your premium amount.


There are many other factors such as number of dependents on you, marital status, foreign travel, travel history, financial status, coverage period chosen by you, plan opted by you, any additional riders opted by you.

Most importantly, make sure to disclose all health-related information at the time of buying term insurance. If you hide vital facts or neglect disclosing them, it can get your claim rejected at your need of hour.

Categories: Insurance

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January 21, 2019 How is Term Insurance Premium Calculated?