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Here’s Why Term Insurance Premium is Lower than other Plans

By PolicyBazaar
  | Published: 08 December 2020 | Last Updated On: 08 February 2021

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Term insurance plans are considered the most basic and traditional form of risk mitigation plans that are designed and developed to provide financial protection to your loved ones during the strokes of uncertainties on the trail of life. Although there are numerous benefits of term insurance plans the one that draws the maximum attention is the low rates of premium. When compared to any other sort of insurance plan the payable premium for term plans turns out to be the lowest. This is one of the major reasons behind the immense popularity of these plans amongst buyers not just in the UAE but all across the globe. 

People looking forward to buying an insurance plan that can provide financial support and assistance to their loved ones mostly go for term plans due to their affordability and flexibility. Term plans are simple, easy to buy, provide high amounts of coverage, and affordable. Now, the question arises why is that out of all type of insurance plans term plans are the cheapest? What is the reason behind this disparity in pricing? Is it due to a lack of features? 

To answer all your queries, we’ve come up with a new blog that will encompass all the nuances of term insurance plans. Furthermore, we will take a closer look at how the pricing of insurance plans is calculated and what are the reasons behind the disparity in prices of premium for different plans, so stay tuned. 

Understanding Term Insurance Plans

The first step in the process of understanding the pricing of insurance is understanding the insurance plans themselves, the way they function, and the type of coverage they offer. As mentioned earlier term insurance plans are defined as traditional and the simplest form of insurance plans that are designed and developed purely with the objective of risk mitigation. There is no maturity value associated with these plans and one does not benefit financially after the policy is matured. 

By definition, term insurance plans can be defined as a unilateral agreement between two parties i.e. the provider and the buyer under which the buyer pays an amount regularly known as premium against which the provider offers the services. The service includes a guaranteed payout to your nominee in case of any event that leads to disability or the untimely demise of the policyholder. However, an important point to be kept in consideration here is that if the policyholder manages to surpass the policy period of the plan there is no payout. 

With the right term insurance plan, you can secure the future of your loved ones. We all know that the trail of life is uncertain and therefore the right decision is to stay prepared. In case you are the sole breadwinner of your family, it becomes even more important to plan for the future of your loved ones. The premiums of term plans are quite affordable and do not add a burden to your budget. By paying a small amount you can take care of your loved ones and ensure that their future is secured even when you are not around to look after their needs. 

The premium of Term Plans

Since we’ve understood what are term insurance plans and how do they function in real-time. Now it's time we move on to the pricing of these plans. The pricing of term insurance is always lower than other types of insurance plans and there are several reasons behind this disparity. In this section of the blog, we’ll take a closer look at the reasons that make term insurance plans the most affordable form of insurance available in the market. 

No Maturity Benefits/ Returns

The first reason that makes term insurance plans the most affordable form of insurance is that there are no maturity benefits associated with these plans. Unlike term insurance, other plans such as life insurance, endowment plans, SIPs offer returns on maturity which makes them suitable options for risk mitigation coupled with investment. As there are no maturity benefits associated with term plans the premium of these plans is lower in comparison to other types of insurance plans. 

No Bifurcations

As mentioned, term plans are traditional and simple insurance plans that have no bifurcations. Contrary to this, other insurance plans have bifurcations associated with them. The premium paid by the policyholder is broken down into different parts which is the reason it turns out to be higher. The premium is broken into the cost of coverage, admin charges, and investment. As there is no investment component associated with term plans the payable premium is lower than other types of insurance plans that have an investment component associated with them. 

Lifestyle

This point is not just specific to term insurance plans but all types of insurance policies. When you apply for an insurance plan, the provider inquires about your medical history and lifestyle. If you have a healthy track record and you refrain from habits like smoking and regular drinking the payable premium is reduced as the chances of claim submission are reduced. On the other hand, if you have a medical history and you smoke or drink regularly then you will have to pay a higher premium as the chances of claim submission are increased significantly. 

Policy Period

Another major factor that affects the premium of your term insurance plan is the policy period. The policy period in the case of term insurance is known as the term of the plan. If you have a term plan that has a higher validity period then the payable premium will be higher in comparison to a plan that has a lower validity. The same goes for different types of term insurance. 

Profession

The profession of the policyholder also plays a vital role in deciding the premium of the term plan. If you work into professions that fall into a high-risk category then the payable premium would definitely be higher in comparison to professions that fall into the low-risk category. Some of the professions that fall into the high-risk category are construction, mining, defense, etc. The other professions that fall into the low-risk category are teaching, IT, BPO, desk jobs, etc. 

Insurance providers often reject the application of people who are involved in extremely hazardous professions as the chances of claim submission is very high. Companies that accept the application will increase the payable premium to make sure that the risks are covered and the acceptance of the application is not a deal of loss. The concept is applicable to all types of insurance plans, whether it is term insurance, endowment plan, or life insurance. 

In a Nutshell

Premium is the most important component of any insurance plan as it works as the primary driving force that keeps your policy active. Whenever you go ahead and purchase any type of insurance plan make sure you are indulged in proper research and analysis. As a consumer, you can make use of the internet and different web aggregators to discover, shortlist, and compare different plans to find that not only fit your budget but also fulfill all your needs.