How Are Endowment Policy Premiums Determined?

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Updated on Jul 13, 2022

An endowment policy can be regarded as one where assets and insurance are combined in one policy. In these policies, you can save money over time so that you may receive a cash payment when the policy matures. However, for this, you need to make sure that you – the policyholder – have survived when said period comes. You can also use these policies to create a financial safeguard for yourself as well as your family members following retirement. The money that you get from such a policy also helps you fulfill a wide range of financial obligations. This includes the likes of your child’s education and their marriage.

You can also buy a new home with the money that you get when an endowment plan matures. In these plans, you have to keep paying premiums each month for a certain period, and in lieu of that, you get the lump-sum payment that we have talked about above. There are two main ways in which the cost of insurance can be collected. It may be collected at one go at the beginning of a year. Or, you can pay it at definite intervals throughout the year. However, if you die after the expiry of the policy coverage period the insurer would not have to pay more than a minimum sum.

The different types of endowment plans 

Well, there are four main varieties when it comes to endowment insurance policies – unit-linked endowment plans, with-profit or full endowment, low-cost endowment, and non-profit endowment. In the unit-linked plans, your insurance premiums would be divided into several units that would be held by a certain investment fund. The good thing with these policies is that you can choose the funds where your money would be invested. In the with-profit or full endowment plans the sum assured is determined right at the beginning of the policy coverage term.

However, this amount can always increase based on the bonuses that you accumulate in this period. A low-cost endowment policy is one where the entire program is designed in such a way that the policyholder can accumulate the funds that they can use after a certain period to make specific payments such as mortgages. The non-profit endowment plans are ones where there is zero participation in the profits that are being generated by the insurers. This means that there are no bonuses in these policies. However, the insurers that offer these policies want them to compete against other insurance policies.

This is the reason why they provide guaranteed additions in these policies which makes it easy for you to generate some extra income.

How are the premiums of these policies calculated?

A wide range of factors is used to determine the premium that you have to pay for an endowment insurance plan. We will talk about them in detail right now.

1. The effect of sum assured on premium calculations

If you die within the period when you are covered by the policy the insurers would offer the sum assured to the people who you have nominated to be the beneficiaries of the policy.

If the sum assured is a big one the premium would be high too.

2. The effect of age on premium calculations

When it comes to determining the premium of an endowment policy, age is an important factor as well. Remember that the older you get the costlier these policies become. This is because when we get older our bodies become host to various diseases and ailments. This is why if you wish to save money on the premium of these policies it would be better if you buy them when you are younger.

3. The effect of gender on premium calculations

When insurers calculate the premium of an endowment plan they also take into account the gender of the insured. In some cases, these companies use statistical models to compute how long the insured would live. It has been shown in several studies that women normally live five years more than men. This is the reason why they have to pay lower premium rates than men.

4. The effect of cigarette and tobacco usage on premium calculations

It has normally been seen that people who do not use tobacco in any form such as smoking cigarettes live longer and healthier lives.

It is common knowledge that people who partake in these activities would contract a wide range of severe illnesses some of which can become deadly with time as well. This includes the likes of lung cancer and throat cancer. This is why such people have to pay a higher premium when they try to buy endowment insurance compared to ones who do not have such habits.

5. The effect of your medical background on premium calculations

The insurers also look at the medical past of people who apply to buy these policies.

As such, it affects the premium that they have to pay in these cases. So, if you have a history of suffering from a critical illness or if you are presently suffering from a major ailment, be ready to pay a high premium for your endowment policy. There can be no doubt about this. The most prominent examples of such ailments are urgent and potentially life-threatening disorders such as cancer, type 1 diabetes, heart illness, and liver disease. So, if you are or have suffered from any of these ailments you can be sure that you would have to pay a higher premium.

Also Read: What is an Endowment Policy, and why should you get it?

Conclusion 

When you buy an endowment plan you pay a premium as long as you are supposed to as per the contractual agreement you have with the insurer. When you reach the retirement age or maturity of the policy you collect the fruits of the same in the shape of the sum assured that the insurer is contractually obligated to pay you. So, if you are looking for guaranteed money – and also a lot of it – it is better that you buy the policies that we are talking about over here.

Mar 23, 2022
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PayBima Team
PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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