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Mortality charge, the key component of life insurance premium, refers to the part of the premium that provides for death benefit. Put simply, this is the charge levied by the insurance company to hand over the sum assured to the nominees of the dead person.
Mortality charge constitutes the largest cost component in the case of a pure term insurance plan. It is included in endowment plans and Ulips (unit-linked insurance plans), too, but other charges like premium allocation and policy administration costs (in the case of the latter) corner a bigger chunk of the premium in such products. Here, unlike pure term policies, the bulk of the premium goes towards investing in a savings or investment fund, which is returned to the policyholder when the policy matures or the policyholder dies. The mortality charge for an insurance-seeker is determined by several factors, including the table of charges prepared by the Life Insurance Corporation (LIC), since this is the only company which has five decades of experience and consequently has historical data on life expectancy. This table is now being reviewed, with data from all companies being incorporated. The premium rates are expected to fall as life expectancy of the average Indian has gone up.
Apart from this table, private players also take into account their own claim experience while fixing premiums.
Age is the primary determinant of the effective mortality charge, with the state of the individual's health contributing to the assessment of risk. The younger and healthier you are, the lower the premium likely to be charged from you. Therefore, it makes sense to buy insurance at a young age. A 25-year-old will enjoy greater benefits than a 55-year-old in terms of lower mortality charge and, by extension, the annual premium, due to higher life expectancy. Also, the mortality charge for women will be lower than that for men in the same age group. Similarly, a smoker will have to shell out a higher premium compared with a nonsmoker.
Financial planners typically recommend buying pure protection products — term plans — over other more expensive policies like Ulips and endowment plans. Term policies are the cheapest form of life insurance available today and, thanks to the formation of two special categories of term plans — high-end and online, the rates are coming down at a faster pace.
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