Components of Life Insurance Premium for Endowment Plan
In many parts of the world, insurance policies are sold, not bought. In India, approximately 70-80% of life insurance policies sold are non-term varieties, meaning they are not pure risk cover policies. This can sometimes lead to confusion among buyers, as the breakdown of premium components is often not fully explained by agents, leading to mis-selling.
Understanding the components of the premium paid for an endowment policy is crucial to making an informed decision when purchasing life insurance. By asking for a detailed breakdown of the premium, you ensure that you are fully aware of what you are paying for and why.
Example Breakdown of Premium Components
Let’s take an example of a 15-year endowment policy for a 35-year-old individual.
Details of the Policy:
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Annual Premium: Rs. 100,000
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Sum Assured: Rs. 25,00,000
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Policy Type: 15-year Endowment Policy
Approximate Breakdown of Premium (for illustration purposes):
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Mortality Premium: Rs. 10,000
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Agent Commission Expense: Rs. 25,000
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Operational Expense: Rs. 10,000
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Profit/Loss: Rs. 5,000
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Policy Holder Fund (Investible Surplus): Rs. 50,000
Key Components Explained:
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Mortality Premium:
This is the pure risk component of the policy. The mortality premium is used for covering the risk in case of a fatal event during the term of the insurance policy. It is the same as the premium paid for a pure term life policy covering the same sum assured of Rs. 25,00,000. -
Agent Commission Expense:
This expense is the commission paid to the agent who sold the policy. The commission is typically a large part of the premium paid during the initial years of the policy. It can sometimes account for a significant portion of the total premium, reducing the amount that is invested. -
Operational Expense:
This refers to the costs involved in maintaining the insurance policy, such as administrative expenses, customer service, and other overheads incurred by the insurance company for processing policies. -
Profit/Loss:
This is the amount the insurance company makes as profit or incurs as a loss from issuing the policy. In our example, there is a Rs. 5,000 profit margin. -
Investible Surplus:
This is the amount of money left after deducting mortality premiums, agent commissions, and operational expenses. The investible surplus is the portion of the premium that is actually invested by the insurance company in government securities (G-secs) or bonds. Typically, 90% of the interest generated from these investments is distributed as bonuses to policyholders.
Why Understanding This Matters:
Knowing the breakdown of your premium helps you make informed decisions about your life insurance policy. Many buyers don’t realize that only a small portion of their premium goes towards life coverage (the mortality premium), while the rest is used for commissions, operational costs, and investment.
Before committing to a life insurance policy, especially an endowment plan, always ask for a detailed breakdown of your premium. This will help you better understand how much you are paying for life coverage, how much goes into the insurance company’s operational expenses, and how much is invested on your behalf.
Final Thoughts:
Understanding the components of your life insurance premium allows you to make an informed choice. It ensures that you are aware of where your money is going and what you are getting in return. By focusing on the mortality premium and ensuring that a fair portion of your premium is being invested, you can maximize the value of your policy.
Disclaimer:
This is a general illustration and does not reflect the exact breakdown of any specific life insurance policy. Always read the policy documents carefully and consult with your insurance advisor to understand the detailed structure of your premium.
