Will the FPO fund infusion solve Vodafone Idea’s problems?

A life insurance policy is primarily a legal contract signed by the insurer and insured to provide death benefits to the latter’s dependents in case of their demise. In return for this guarantee, an amount is known as ‘premium’ is paid by the insured individual at pre-determined time intervals. The frequency and mode of payment of this premium are decided basis the financial flexibility of the policyholder. Now, there are broadly four factors used by various insurance companies to calculate the premium. Therefore, for the exact same sum assured, the premium amount can very well differ for two policyholders due to these factors.

Underwriting process

Most insurance products require some degree of underwriting. “Underwriting’ is a term used to define the consideration given to a life insurance application, in order to decide whether the policy should be issued depending on the policyholder’s risk profile. This process helps insurers identify the risks involved in the application.

The term ‘risk’ refers to the chance that an insurer is taking by committing financial aid to the insured person in case of an eventually. Now, the risks linked to a particular application may be viewed and categorised differently by each insurer. The underwriting tools include factors like your age, gender, job (how risky is your occupation), lifestyle habits (are you a smoker, etc.), policy tenure, other hereditary diseases (diabetes, cancer, etc.) in the family, among others.

Mortality

The most widely spread advice about life insurance is to purchase it ‘early’. This is because the premium rates are significantly lower for, say, someone buying it at the age of 22 compared to that of 42. The reason is quite simple. Insurers like to believe that old age brings greater uncertainty to life due to vulnerability to several diseases. Your immune system becomes weaker with age and so does your inner ability to fight and recover quickly.

Besides, when you buy insurance at the age of 42, there could be quite a few pre-existing illnesses as well. These bring undue risk for the insurer and in order to compensate for the same, they charge a higher premium.

Insurer’s profit

The premium on an insurance policy doesn’t solely depend on the policyholders, in fact, some of it is related to the insurer too. Insurers have a list of cost structures for writing the policy, assessment of risk, operational costs, and investment returns. These even include the cost of the policy document, the insurance agent’s commission, and other overhead expenses incurred by the insurer. The profit an insurance company is looking to make from a policy can, thus, play a definite role in deciding the premium cost.

Each insurance company would have its own profit margins that they’d like to meet. It’s simple to understand the difference in premium rates after taking this fact into account.

Contingency charges

One of the minor contributors to your life insurance premium is the contingency charge. It is added in the form of minimal value change in the premiums. Although contingency contribution to premiums is the bare minimum for policyholders, it plays a huge role in maintaining the finances for the insurers. In case of unforeseen situations like the Covid-19 pandemic, there’s an unanticipated large number of claims in a year. The inclusion of contingency spread over a large pool of customers, thus, averages out the overall cost for the insured and helps companies to balance their profits.