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A Detailed Explanation on Insurance Premiums!

By PolicyBazaar

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Published: 28 November 2019Last Updated On: 08 February 2021

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You all must have heard, nothing comes for free in life. The same is the case with insurance. For any kind of insurance that you buy, you will have to pay premium.

Let’s discuss the basics in order to help you understand what exactly is an insurance premium and how does it work?

To define it in the easiest term, an insurance premium is an amount charged by your insurance provider against the policy you have purchased. Hence, making this premium the cost of your insurance.

For example,

You have purchased the best term insurance plan that includes a high coverage amount. However, it doesn’t end here, you will have to pay an insurance premium to continue the insurance services.

Generally, insurance premiums have a base calculation, and then on the basis of your location, personal information, and other factors as determined by the company, the discounts will be added to the basic amount of premium for getting the preferred rates, or lower insurance premiums.

Sometimes, the payment for insurance is done on an annual, semi-annual, or monthly basis. As mentioned above, the insurance premium is the cost of the policy, hence, anything above this cost will not be considered as premium.

For instance, when an insurance provider charges a fee for issuance, this extra fee is not premium. Normally, it would be defined separately.

Factors Determining the Insurance Premium

The premium on any insurance is driven by the following key factors.

Amount of Coverage Affecting the Premium

If you purchase an insurance policy, you will always have to pay higher premiums for higher sum assured. There are two ways to save on premium-

  • Your coverage amount can be altered by the value you want on whatever you get insured. The more the value you get insured, the more would be premium rates.
  • If you go for a policy with a higher deductible, you can make less payment for the same coverage amount.

Kind of Coverage has an Impact on the Premium Rates

Insurance providers offer various options while purchasing an insurance policy. Your insurance premium may be higher if you select a comprehensive coverage.

For example, when looking for the best term plans, you will see that the one, which includes more additional benefits and high sum assured, will charge higher premiums.

Competition in the Target Area and Insurance Industry

If the insurance provider decides they really want to pursue a certain segment of the market, they may deviate the rates for attracting new business. This can be an interesting part of insurance premiums as it may alter drastically.

Personal Details of the Applicant of the Insurance Policy

Your residence, history of insurance, and various other factors of your life are used as a part of the premium calculation. Each insurance company has its own rating criteria.  

Some providers use the insurance scores of the applicants that can be calculated by taking various personal factors into consideration. These factors most of the time translate into discounts on the premium of your insurance policy.

In a Nutshell!

Insurance is not just about investing money for earning returns on it, it also about offering financial protection. But this protection does not come free. You will have to pay insurance premiums in order to remain secure under the insurance policy.

Before buying a policy, you must get an idea of the estimated insurance premium that you will have to pay. Your premium can be more or less expensive. The cost may vary depending upon the kind of coverage you are opting for and the risk factor involved.