Sum Assured & Premium Calculation
What the sum assured is, what a life insurance premium pays for and which factors set it, how the premium paying term, payment mode and grace period work, and how GST applies today.
The sum assured
The sum assured is the amount the insurer promises to pay when the insured event happens: death, or maturity in a savings plan. It is fixed when the policy is bought. The premium is the price of that promise.
What a premium is made of
A premium pays for three things: the risk cover, known as the mortality cost; the insurer's expenses; and, in savings plans, a savings or investment portion. Insurers calculate it actuarially, which means from statistics of how likely a claim is, together with expenses and expected investment income.
The factors that feed the calculation are age, health, smoking status, occupation, the sum assured, the policy term and the type of plan. Each changes either the risk or the amount of cover. The choice of nominee does neither: who receives the money has no bearing on the risk of death, so it does not change the premium.
How long and how often it is paid
The premium paying term is the period over which premiums are due. It may equal the policy term (regular pay), be shorter (limited pay) or be a single payment, but it cannot run beyond the policy term. The choices on offer are set in each product's terms.
Premiums can usually be paid yearly, half-yearly, quarterly or monthly. Paying in instalments attracts modal loading, an extra charge that compensates the insurer for receiving the money later and so earning less investment income on it.
If a premium is not paid on its due date, a grace period follows: 30 days for yearly, half-yearly and quarterly modes and 15 days for the monthly mode. During the grace period the policy remains in force and a claim is payable even though the premium is overdue.
GST and the governing rules
Since 22 September 2025, premiums on individual life insurance policies, whether term, ULIP or endowment, are exempt from GST. Before that they carried GST at a headline rate of 18%, which older material still quotes. The exemption names individual policies only; group policies are outside it and continue at 18%.
Life products are governed by the IRDAI (Insurance Products) Regulations, 2024 and the Master Circular on Life Insurance Products of 12 June 2024, which replaced the 2019 product regulations.
Rules at a glance
Modal loading in rupees
Illustration with assumed figures: Arvind's yearly premium is ₹24,000, and the insurer applies a modal loading of 4% if he pays monthly. The year's total becomes ₹24,000 × 1.04 = ₹24,960, or ₹24,960 ÷ 12 = ₹2,080 a month. He pays ₹960 more over the year for spreading the payments. The loading percentage is invented for the example; each insurer sets its own.
What a five-year delay does to the premium
- Assumptions, for arithmetic only: a term plan costs ₹10,000 a year if bought at 30, and the premium rises by 8% for each year of delay, compounded yearly.
- After one year: ₹10,000 × 1.08 = ₹10,800. After two: ₹10,800 × 1.08 = ₹11,664.
- After three: ₹11,664 × 1.08 = ₹12,597 (rounded). After four: ₹13,605 (rounded). After five: ₹14,693 (rounded).
- Increase = ₹14,693 − ₹10,000 = ₹4,693, which is 46.9% of ₹10,000.
Result. Buying at 35 instead of 30 costs about 47% more on these assumptions. Simply adding 8% five times gives 40%, which understates it. The 8% is illustrative; actual differences by age vary with the insurer and the product.
Key points
- The sum assured is fixed at purchase; the premium pays for mortality cost, expenses and, in savings plans, a savings portion.
- Age, health, smoking status, occupation, sum assured, term and plan type affect the premium; the nominee does not.
- The premium paying term can be shorter than the policy term but never longer.
- The grace period is 30 days, or 15 days for monthly premiums, and cover continues during it.
- Individual life premiums are exempt from GST since 22 September 2025.
Common misunderstandings
- A policy does not lapse on the due date: it stays in force through the grace period, and a claim arising then is payable.
- Modal loading is not a penalty: it is the extra charged for paying in instalments instead of once a year.
- The GST exemption does not cover every life policy: it names individual policies, and group policies continue at 18%.
Questions people ask
Can premiums be payable for longer than the policy runs?
No. The premium paying term can equal the policy term, be shorter or be a single payment.
What happens if the insured dies during the grace period?
The policy is still in force, so the claim is payable even though the premium was overdue.
Why does a smoker pay more than a non-smoker of the same age?
Smoking status is a risk factor used in pricing: a higher assessed risk means a higher mortality cost within the premium.
What this lesson relies on
- IRDAI (Insurance Products) Regulations, 2024
- IRDAI Master Circular on Life Insurance Products (12 June 2024) — grace period
- GST Council, 56th meeting (3 September 2025) — exemption for individual life and health insurance policies from 22 September 2025
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.