When you go to buy a life insurance plan, you will find that there are certain charges other than the premiums which you pay on your life insurance plans. The Charges include a commission to the insurance agent, administration charges, mortality charges, etc. This explains why it is always good to buy a life insurance policy at an early age this way you can get it at a very low premium. The premiums of regular plans (term plans) increase as you age. When you buy a life insurance policy, the insurance company will add a charge for the life cover and cover certain additional expenses.
One of the major charges includes a Mortality Charge. This becomes the actual cost of the life insurance in the policy. In most policies, the majority of the premium goes into investing in a savings fund which is given to the policyholder when his policy matures. Mortality Charge is deducted from the Policy’s account value.
LIC’s table of charges became a go-to table of charges for most companies. Though these rates were prepared considering the historical data on life expectancy in India most private insurance companies refer to their own tables to calculate the mortality charges.
There are three factors that are used to calculate the mortality charge
- The net amount at risk in the policy
- The risk classification of the policyholder
- The age of the policyholder
Thus the sooner you buy life insurance, the lower the mortality rate. Life expectancy stands as one of the most influential factors to determine the premium of your life insurance.
Life expectancy simply means the age at which a person is expected to live. There are factors which affect life expectancy such as :
- Age i.e. when you’re born
- Your gender
- Your race
- Medical conditions
- Family medical history
Life expectancy changes over time. Companies use complex formulas to factor out the people who have died before you. As you grow old and age past your mid-life, you eventually outlive a number of people who are younger than you, and thus your life expectancy increases
‘The older you get ( after your mid-life) the older you are likely to get.
Life expectancy and Life Insurance Premium
You may find it interesting that your life expectancy and your insurance premium share a direct relation. The younger you are at the time of purchasing the policy, the more likely you are to live longer. This means you pose a lower risk to the insurance company, as you are less likely to die in near future, which would require the company to payout the insurance amount, even before you’ve paid much to the policy
Opposite to it, the longer you wait To purchase Life Insurance the lower your life expectancy. and that is a higher risk for the life insurance company. Companies compensate for that by charging a higher premium. There are many people who are under that if they should purchase life insurance for their children. After all, having a policy as a child ensures the lowest possible premium. but there are a lot of factors to consider for this as a point of life insurance to help your dependents in the event of your demise, And thus it becomes irrelevant to purchase a policy for your child.
However, it could provide your child with the lowest possible premium and cover for their entire length of life.
Principle of life expectancy suggests that you should take a life insurance policy for you and your spouse Sooner than later. not only will you save money on Global premium but it will also become a significant financial resource with time.
Life Expectancy and ROI on your policy
Your life expectancy also plays an important role in determining the potential return on investment you can achieve ROI is defined as Payout to Beneficiaries minus Amount paid into Policy at the time of death.
For e.g, if your insurance payout is Rs1,50,000 and you’ve paid Rs 48,000 in the premiums for the cover. Your ROI will be Rs 1,02,000
Life Expectancy and Annuities
An annuity is a contract between you and the insurance company, in which the company agrees to provide you with an income stream until your death. The payout starts at an age and depending upon the terms, it may also continue to your beneficiary after your demise.
The payment to your beneficiary may be less compared to the payments made to you while you were alive.
The amount which the insurance company pays out to you is determined by your life expectancy as well. Here is how
- If you choose a joint life annuity, with a period-specific payout, you are estimating your life expectancy. However, if you die before the contracted time, the beneficiary will continue to receive the funds for the remaining time.
- If you choose a joint life option with survivor benefits, you are choosing the contract that will continue to make payments to your beneficiary after your death. If you die first, the beneficiary’s annuity payment amount is reduced but if your beneficiary dies first, you will continue to receive the full payment amount. This way the annuity contract benefits both and the premium is decided by your and your beneficiary’s life expectancy.
- If you choose a single-life annuity, payments are made on the basis of your life expectancy till the time you live.
Annuity payments are made on a systematic basis with, monthly, quarterly, semi-annually or annually based on the contract.
It is critical to be aware of your life expectancy, not only for the purpose of your life insurance’s premium but also to make intelligent decisions about your annuity payouts. But then again, Life expectancy varies for each individual and similarly, there is no one size fits all.
We at Rurash, understand the intricacies of not just insurance but also factors affecting your needs and your future requirements. We have a team of experts who will be happy to assist you in selecting the best possible insurance plans for you.