What Is Premium in Health Insurance & How Is It Calculated?

4 min read | Updated on May 22, 2025, 11:39 IST

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Shekhar and Mohit work for a BPO. After having their lunch, Shekhar asked Mohit for a quick fag break. Mohit, a teetotaller, declined as usual but said he would accompany him to the nearby tapri. During their walk, Mohit got an intimation about the reimbursement approval of a medical bill for her mother. Shekhar asked what that was all about. Mohit told him that his mother had been admitted to a hospital that was not on the network list of his insurer. He paid everything out of pocket, and today the insurance company reimbursed his claim.

Shekhar was impressed and decided to get health insurance for himself and his family. He was a couple of years older than Mohit. When he enquired online, he found out that his annual premium was almost double what Mohit was paying.

People generally focus on coverage and benefits of their health insurance policy and accordingly agree to pay a premium. Everyone expects the best future without any contingencies. However, an insurance company underwrites a tremendous amount of risk by covering the health expenses of individuals. Hence, the premium calculation takes into account several factors, starting with the age, income, lifestyle, and medical history of the applicant.

Whether you're buying your first policy or comparing plans online through platforms like Upstox, knowing how premiums are calculated is essential. This is what we have tried to break down in this blog.

What Is a Premium in Health Insurance?

When you buy a health insurance policy, you enter into a contract with your insurer. As per the contract, the insurer is obligated to cover your healthcare expenses (such as treatment for critical illnesses and hospitalization) in exchange for the consideration you pay (annually, quarterly, or monthly). This consideration paid by the policyholder to the insurance company for covering all healthcare expenses related risk is known as a premium.

If the premium is not paid on time, your policy may lapse, leaving you without coverage during emergencies. Premiums vary widely depending on factors such as age, health conditions, sum insured, and the type of plan selected.

Why Does the Premium Vary?

As in the original example cited at the beginning of this blog, Shekhar was quoted a significantly higher premium than Mohit. The reasons why premiums vary, has been explained as follows:

These factors have been explained as follows:

Age

The older you are, the higher your risk of illness, which translates to higher premiums. This is the reason why, in the original example, Shekhar was quoted a higher premium, as Mohit had taken the policy earlier and was a couple of years older than Shekhar.

Pre-existing Conditions

If you already have diabetes, hypertension, or any chronic illness, the premium is likely to be higher.

Sum Insured

A ₹5 lakh cover will cost significantly less than a ₹20 lakh policy.

Policy Type

Family floater plans may be cheaper per head, but could cost more overall due to age mix.

Lifestyle Habits

Smokers, drinkers, or those with a high BMI usually attract loading (additional charges).

Add-ons Chosen

Maternity, critical illness, room rent waiver, or daily cash benefits, all add to your base premium, making your policy more expensive.

Location & Hospital Network

Premiums may be higher in metropolitan cities due to more expensive medical services.

How Is Health Insurance Premium Calculated?

Health insurance premium calculation takes into account a variety of factors, starting with your risk profile, expected medical costs, and policy features. Insurance companies can also use actuarial data and algorithms to compute the likelihood that you will make a health insurance claim.

Here is a breakdown of the different factors that affect the health insurance premium:

Base Premium

Determined by your age, health status, sum insured, and type of plan.

Lifestyle Factors

Additional charges might be applied for high-risk factors like smoking, obesity, or pre-existing conditions.

Add-ons or Riders

Optional benefits like maternity cover, OPD, or critical illness coverage add to the total premium and make your policy more expensive.

You should also consider the application of 18% GST over and above the mentioned costs.

How to Reduce Health Insurance Premiums?

Here are some of the tips you can use to reduce the net premium payable:

Choose a higher deductible or copay

You pay a portion of the bill, but save on premiums.

Opt for long-term plans

Policies with terms of 2–3 years often come with discounts.

Live healthy

Maintaining a BMI, not smoking, and exercising regularly can lower your risk profile.

Drop unnecessary add-ons

Only opt for riders you truly need.

Use NCB and wellness rewards

Many insurers offer discounts for claim-free years and healthy habits.

Compare policies online

Platforms like Upstox help you evaluate plans side by side and grab exclusive discounts.

Summing Up

Your health insurance premium is based on various factors, including your age, lifestyle preferences, and overall risk of making a claim. You should not only understand how it is calculated, but also how to reduce the amount. When it comes to health insurance, choosing an insurer with the highest quote might not be the best idea. Consider the coverage amount, your preferred hospitals, and any additional add-ons.

FAQs

What is a health insurance premium?

It’s the amount you pay to keep your policy active—monthly, yearly, or as per chosen frequency.

Does my premium increase every year?

It can increase based on your age, claim history, or policy upgrades.

Can I lower my premium without losing coverage?

Yes, by buying early, choosing higher deductibles, or removing unnecessary add-ons.

Are online calculators reliable for estimating premiums?

Yes, they give accurate estimates based on insurer data and your profile.

What happens if I miss a premium payment?

You may lose coverage after the grace period and have to undergo medical underwriting again.

About Author

Upstox Desk

Team of expert writers dedicated to providing insightful and comprehensive coverage on stock markets, economic trends, commodities, business developments, and personal finance. With a passion for delivering valuable information, the team strives to keep readers informed about the latest trends and developments in the financial world.