ZestExam

Premium Calculation

UIIC AO · Insurance Awareness

Also prepare for:IBPS PO IBPS Clerk SBI PO SBI Clerk

← Insurance Terminology

💡

Core Concept

Read this first — the foundation of the topic

PREMIUM CALCULATION — INSURANCE AWARENESS ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ CORE CONCEPT ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ A premium is the amount you pay to an insurance company to keep your policy active. Think of it as the price you pay for protection. The insurance company calculates this amount carefully so it can pay future claims and still run its business profitably. In simple words: Premium = Price of Insurance Cover. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ KEY RULES / PROPERTIES ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ 1.

Higher the risk → Higher the premium. 2. Higher the Sum Assured (coverage amount) → Higher the premium. 3. Older the person → Higher the life insurance premium (more risk of death). 4.

Longer the policy term → Premium per year may be lower, but total paid is more. 5. The premium has two main parts: Pure Premium (covers actual risk/claims) and Loading (covers expenses, profit, and contingencies). ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ FORMULA BLOCK ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Gross Premium = Pure Premium + Loading Pure Premium = (Probability of Loss) x (Sum Assured) Net Premium Rate = (Pure Premium / Sum Assured) x 1000 [This gives the rate per Rs. 1000 of Sum Assured] Loading includes: expenses + profit margin + contingency reserve ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ EXAM PATTERNS — WHAT GETS ASKED ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ • Definition-based MCQs: 'Which factor does NOT affect premium?' • Calculation-based MCQs: Find premium given Sum Assured and rate per Rs. 1000. • Concept MCQs: 'What is loading in premium calculation?' • Comparison MCQs: 'Which type of policy has the lowest premium — Term, Endowment, or Whole Life?' Note: Term Insurance has the LOWEST premium. Whole Life has HIGHER premium than Term. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ SHORTCUT / TRICK ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ TRICK 1 — Premium Calculation from Rate per 1000: Premium = (Sum Assured / 1000) x Rate Example shortcut: Sum Assured = Rs. 5,00,000 | Rate = Rs. 25 per 1000 Premium = (500000 / 1000) x 25 = 500 x 25 = Rs. 12,500 TRICK 2 — Factor Memory Aid using 'ASHM': A = Age of insured S = Sum Assured H = Health / Occupation / Habits M = Mode of premium payment (monthly/annually) All four increase or decrease the premium.

Remember ASHM. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ WORKED EXAMPLE ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Question: Ramesh takes a life insurance policy. Sum Assured = Rs. 10,00,000. The premium rate is Rs. 30 per Rs. 1,000 of Sum Assured.

Loading is 20% of Pure Premium. Find the Gross Premium. Step 1 — Find Pure Premium: Pure Premium = (Sum Assured / 1000) x Rate Pure Premium = (10,00,000 / 1000) x 30 Pure Premium = 1000 x 30 = Rs. 30,000 Step 2 — Find Loading: Loading = 20% of Pure Premium Loading = 20/100 x 30,000 = Rs. 6,000 Step 3 — Find Gross Premium: Gross Premium = Pure Premium + Loading Gross Premium = 30,000 + 6,000 = Rs. 36,000 Answer: Gross Premium = Rs. 36,000 ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ COMMON MISTAKE ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Students confuse Pure Premium with Gross Premium. Pure Premium only covers the risk cost.

Gross Premium is what you actually pay — it includes loading (admin costs + profit). Always add loading to get the final payable premium. Never skip Step 2 in calculations.

🔑 Key Points

Premium is the amount paid by the policyholder to the insurer to keep the policy active.
Gross Premium = Pure Premium + Loading; this is the actual amount paid.
Pure Premium = Probability of Loss × Sum Assured; it covers only the risk cost.
Loading covers administrative expenses, agent commission, profit margin, and contingency reserve.
Formula: Premium = (Sum Assured ÷ 1000) × Rate per 1000 — most common exam calculation.
Higher age, higher Sum Assured, and risky occupation all lead to higher premiums.
Term Insurance has the lowest premium among all life insurance products.
Mode of payment affects premium: monthly payment costs more in total than annual payment.

📌 Exam Facts

The person who calculates insurance premium using statistical data is called an Actuary.
Pure Premium is also called Net Premium or Risk Premium in insurance terminology.
Loading typically includes three components: expense loading, profit loading, and contingency loading.
Term Insurance provides pure risk cover with no maturity benefit, hence lowest premium.
Endowment policies have higher premiums than Term policies because they combine savings and risk cover.
The practice of setting different premiums based on risk level is called Risk Classification or Underwriting.
Rebate on premium is allowed under Section 59 of the Insurance Act, 1938 only in specific conditions.
Under IRDAI regulations, insurers must file premium rates with IRDAI before offering any product to the market.

🚀 60-Second Revision

Formula: Gross Premium = Pure Premium + Loading — never forget to add loading.
Formula: Premium = (Sum Assured ÷ 1000) × Rate — use this directly in MCQ calculations.
Remember ASHM factors that affect premium: Age, Sum Assured, Health/Occupation, Mode of payment.
Trap: Exams may ask 'what is NOT a component of loading' — Loading does NOT cover claim amount directly.
Remember: Term < Endowment < Whole Life — this is the order of premium from lowest to highest.
Pure Premium = Net Premium = Risk Premium — all three names mean the same thing in MCQs.
The professional who calculates premiums using mortality tables and statistics is called an Actuary.

🎯

Test yourself under real exam conditions

A timed UIIC AO mock shows exactly how Premium Calculation questions appear in the actual paper — and where you lose marks.

Take Free Mock Test →Practice Panel

✓ Free mock✓ Instant percentile✓ AI Battle Plan after test