One invests in an insurance policy mainly because of the tax benefit , investment returns and of course the life cover it offers. And around beginning of the year, one would invest in an insurance policy only for the tax exemption benefit. Insurance policies do give you the above benefits and more but it is important to know where your funds are getting invested and how is the premium structured.
Taking a life insurance policy is basically securing your nominee future in case of any mishap of death of the insured.It does this by paying a 'sum assured' to the nominees. The sum assured is decided at the time the individual buys the insurance plan and the premium is paid accordingly.
The premium consists of three important elements which individuals should know in order to opt for the right insurance plan:-
Mortality charges
This is the cost charged by an insurance company for protection and certain expenses. This charge is deducted (usually each month) from the policy’s account value. It is based upon the net amount at risk under the policy, the insured’s risk classification when the policy was purchased and the insured’s attained age.The mortality expenses differ depending on the age of the individual and the sum assured- they are higher for a higher age and sum assured.
Sales and administration expenses
Insurance companies incurred sales and administration expenses for operation purposes and recovered from the premiums that the individual pays towards his policy. Agent commissions, sales and marketing expenses and the overhead costs incurred to run the insurance business on a daily basis are examples of such expenses.
Savings component
This part of the premium is invested by the life insurance company in various investment avenues such as government securities (G-secs), bonds, money market instruments and equities in varying proportions. The savings component is what helps generate the returns which insurance companies pay to the policyholder by way of bonuses and the maturity amount.
Seeing the above premium structure , one can now know what amount of premium he should be paying and buy an insurance policy according to his needs.
