Understanding Premiums in Life Insurance: What you need to know

By Vanessa ODURO, Premium Admin Officer, Hollard Life

What is insurance?

Insurance is a financial arrangement that enables you to manage your risks and offers a sense of security. By paying premiums to an insurance company, you gain financial protection against specific risks and losses in your life. Should the insured risks occur, the insurance company compensates the beneficiary or the policyholder, reducing the financial burden of unexpected occurrences.

What is premium?

A premium is the cost of your insurance policy. It is how much you pay the insurance company to obtain and maintain coverage. Depending on the type and terms of your policy and your personal preference, you can pay your premiums monthly, quarterly, semi-annually, or annually. Several factors determine the premiums one is required to pay, including the type of policy you choose, your age, health status, lifestyle, Inflation protector, other covered lives, if any, and coverage amount.

Factors influencing premium

1. Type Of Policy: Your life insurance policy significantly impacts the premium. For example, term life insurance, which provides coverage for a specific period, usually has lower premiums than whole life insurance, which offers lifetime coverage and a cash value component.
2. Age: Age is one of the primary factors affecting life insurance premiums. Generally, the younger you are when you purchase a policy, the lower your premium. Younger individuals are statistically less prone to death than folks, reducing insurance risk.
3. Health: Your health status is critical in determining your premium. Insurance companies typically require a medical examination or health questionnaire to assess your risk level. Individuals in good health often qualify for standard premiums, while those with pre-existing medical conditions may have exclusions or higher premiums for specific health conditions.
4. Lifestyle: Indulging in smoking, alcoholism, or engaging in high-risk activities like skydiving, speed racing, or surfing can significantly impact your premiums. Insurance companies view these behaviours as risky and may exclude these from your coverage or adjust your premium accordingly. However, maintaining a healthy lifestyle, with regular exercise and a balanced diet, can lower your premiums.
5. Coverage Amount: The amount of coverage you choose impacts your premium. Higher coverage amounts result in higher premium payments, ensuring you have adequate protection without overextending your budget.
6. Policy Features: Certain Features, such as riders (additional optional benefits like critical illness cover or waiver of premium), can also increase the premium. These add-ons provide extra protection but come at an additional cost. Riders can be valuable for customising your policy to suit your needs better, but it’s essential to understand how they impact the overall price.

How to pay premiums

No matter the type of policy you select, you must pay your premiums to obtain and maintain cover. Customers can make payments based on the preferred frequency, including monthly, quarterly, semi-annually, or annually. Some policies offer flexible premium options, where you can adjust the amount or frequency of payments based on your financial situation. However, it’s crucial to ensure that you pay your premiums on time; otherwise, you are at risk of your policy lapsing(ending), which means losing coverage and benefits accumulated.

What happens if you miss a premium payment

Missing premium payments can cause several issues on your policy. Your policy will lapse unless you pay your premiums within the grace period. Should the insured incident happen when a policy lapses, you or your beneficiaries will not receive a death benefit. Some policies, particularly whole-life policies, may have a cash value that can cover missed premiums, but this does not apply to most

policies. It’s essential to be aware of your policy’s terms and conditions to avoid unintentional lapses in coverage.

Can premiums change over time?

The answer is Yes. Some premiums change over time, not for all insurance but primarily for life insurance policies; when a policy is due for renewal, the premium might change. It may increase due to the policyholder’s age in some instances. Some insurers even consider the policyholder’s health, but on the other hand, some policies have fixed premiums that do not change over the policy’s lifetime.

There could also be an Inflation protector feature on the policy, which causes an escalation in premiums, enabling premiums to increase on the anniversary of the policy commencement. An escalation in premiums refers to a planned increase over the policy’s lifetime, often to keep pace with inflation or other economic factors to maintain the value of policy benefits. Knowing the structure of your premium payments is very important so you are aware of future premium changes.

Methods of premium payment

Insurance premiums can be paid through multiple convenient methods like bank transfers and stop orders (salary source deductions), as well as more modern digital payment modes like mobile payments like mobile money, hubtle, and express pay; these mobile money platforms allow users to pay premiums quickly and securely, reducing the risk of missed payments and ensuring that policies remain active. The variety of payment options caters to different customer preferences, making it easier for everyone to stay insured. Additionally, this flexibility encourages higher customer retention and satisfaction, as it removes barriers to consistent premium payments.

Challenges associated with these methods

While these payment methods offer convenience, they also come with challenges; for instance, mobile platforms like Mobile Money, Hubtel, and Express Pay may experience technical issues, such as system downtime, delays, or failed transactions.

Bank transfers and stop orders may be prone to errors, such as incorrect details or delays in processing. Bank debits may only succeed if sufficient funds are in the account, leading to timely payments and successful deductions. Additionally, customers relying on these methods may need help reconciling payments with their insurance accounts due to system errors or lack of real-time updates, which may impact their policy status.

Conclusion

Premiums are a fundamental aspect of life insurance, representing the cost of keeping your policy in force; understanding how premiums calculations and the factors that influence them can help you make informed decisions when purchasing or maintaining a life insurance policy. By ensuring prompt payment of premiums and that the coverage meets your needs, you can provide financial security for yourself and your loved ones. Regularly reviewing your policy and staying informed about any potential changes to your premiums can further enhance your financial planning and ensure that your life insurance policy continues to serve its intended purpose. Hollard Life has a variety of unique insurance policies, including funeral, savings and investment products with tailored premiums for everyone. To find out more about our product offerings, visit www.hollard.com.gh.

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