Adequate term cover is a must for the earning members of any family, and the rise shouldn’t affect that
Term insurance premiums are calculated based on the mortality rate and the expected future claims
The fear of contracting covid-19 has seen a surge in demand for life insurance policies in the country. However, given the rising mortality rate and other factors, premiums for term insurance policies have been on the rise in recent months, across tenures. Some insurance companies revised their premium rates three times between March and July this year.
Term plans are pure protection covers that pay a predetermined sum assured on the death of the insured. Such plans offer a large cover at affordable premiums. This year, however, most insurers such as ICICI Prudential Life Insurance Co. Ltd, Tata AIA Life Insurance Co. Ltd and Bajaj Allianz Life Insurance Co. Ltd have sharply increased their premiums for term plans.
According to data sourced from Policybazaar.com, an online insurance aggregator, between March and July, ICICI Prudential Life, Tata AIA and Bajaj Allianz Life increased the premium for their term plans by 37%, 32% and 36%, respectively. The rates were compared for a 30-year-old individual for a tenure of 50 years (up to the age of 80), with a sum assured of ₹1 crore. For covers with a tenure of 40 years (up to age 70), ICICI Prudential, Tata AIA and Bajaj Allianz life increased the term life premium by 37%, 31% and 36%, respectively.
Here are the causes that have led to the rise in premiums and what you should do.
Most insurers cited the increasing mortality rate as the reason for rising premiums. Note that term insurance premiums are calculated based on mortality rate and expected future claims. In case the difference between the actual and expected claims is large, premiums could rise in order to bridge the gap.
Bharat Kalsi, chief financial officer, Bajaj Allianz Life, said term plan premiums, across the industry, are being revised due to several reasons. “One reason is that reinsurers are revising their prices due to the expected mortality experience with respect to the actual experience," he said. Reinsurance companies cover insurers for risk.
Reinsurers are stressed primarily because of the increase in mortality rates in India in the last couple of years, which has had an adverse impact as the number of death claims have crossed the expected mark, said Indraneel Chatterjee, principal officer and co-founder, RenewBuy.com, an online insurance aggregator.
Falling interest rates, too, may have impacted the premiums. Aalok Bhan, director and chief marketing officer, Max Life Insurance, said term plan premiums are the most sensitive to mortality experience and interest rates. “Since March, the interest rates have gone down considerably affecting the sustainability of the term premium rates. The revision in premiums observed is in response to the sharp drop in interest rates since March," he said.
Term insurance premiums are broadly based on the present value of future claims. Bhan said present values are calculated using interest rates. It is what a future stream of money is worth today. “When interest rates go down, the present value of future claims increases and vice-versa. As the interest rates have gone down since March, the present value of future claims has risen and so the premiums have gone up too," he added.
Bhan said the movement in both these parameters (mortality and interest rates) will result in increased premiums. “Further, premium increase at the industry level will depend on whether all the insurers have corrected their premiums based on their experience or some are yet to revise them; and if they have, whether they have corrected to the complete extent as required by the change in mortality experience and interest rates. Hence, any revisions in the future will depend on each company’s consideration across the said parameters."
ICICI Prudential was not available for comments despite repeated attempts.
Term insurance premiums, however, are still lower in India compared with countries such as Singapore and the US.
Demand for term plans
Even though premiums are on the rise, demand for protection plans has seen a spike, thanks to the fear of death spurred by the covid-19 pandemic. Most insurers believe that the price rise will not affect the demand in the medium to long term as awareness has increased.
“There has been a surge in the demand for protection products in the last quarter and this is likely to continue," said Samit Upadhyay, chief financial officer and head of products, Tata AIA Life.
Chatterjee said the increase in premium hasn’t stopped consumers from actively seeking adequate cover for themselves. Family protection has become the prime factor amid the pandemic, he added. Further, Max Life’s India Protection Quotient-Express Survey, conducted during June-July, found that 41% of respondents were looking to purchase term plans for financial protection of their families. They cited the rising covid-19 cases as the reason for purchasing term plans.
What you should do
Adequate term insurance cover is a must for earning individuals in any family, and the spike in premiums should not affect that decision. “This is the only way to protect financial dependants in case of the untimely death of the breadwinner. Also, the premiums remain the same in term insurance for the full tenure of the policy. You should purchase a policy which covers you at least till age 60, which is the normal retirement age. Increase in premium should not be a reason to avoid term insurance," said Melvin Joseph, founder, Finvin Financial Planners, and a Sebi-registered investment adviser.
With decent term insurance, the family may not have to compromise on the standard of living and other goals if the breadwinner dies. “Such a situation can be avoided by purchasing high-value term insurance. The premium paid is worth the peace of mind you get," added Joseph.
The claims settlement ratio is a good parameter to check before zeroing down on an insurer. The ratio indicates the percentage of claims settled by the insurer with respect to the number of claims received. Financial planners recommend taking a sum assured that’s at least 10-12 times your annual income.