Home >Money >Personal Finance >Rising mortality rate drives term insurance premiums upwards

Premiums for term plans are on the rise with some insurance companies revising their rates for the third time between March and July this year. Term plans are pure protection covers that pay a pre-determined 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 increased their premiums sharply.

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 cover up to 80 years of age ( 1 crore sum assured). For covers up to 70 years, ICICI Prudential, TATA AIA, and Bajaj Allianz life increased by premium by 37%, 31%, and 36%, respectively.

We spoke to insurers to understand the cause for the spike in premiums.

Mortality rate

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 the 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 of the reasons is the fact that reinsurers are revising their prices due to the expected mortality experience with respect to the actual experience," he said.

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 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 increase and vice-versa. Given that the interest rates have gone down since March, the present value of future claims has gone up and so the premiums have gone up too," he added.

Mortality experience has deteriorated and reinsurers have increased their prices by a large margin. 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; 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."

However, term insurance premiums are still lower in India compared to countries such as Singapore and the US.

Demand for term plans

Though premiums are on the rise, demand for protection plans has seen a spike, thanks to the fear of death spurred by covid-19. Most insurers believe that the price rise will not have an impact on 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 trend 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 in the pandemic period, he said. Further, Max Life’s India Protection Quotient-Express Survey, conducted during the pandemic, found that 41% of respondents were looking to purchase term plans for financial protection of their family. They cited the rising covid-19 cases as the reason for purchasing term plans.

Adequate life cover implies that there is no burden or liability on your family in your absence. “One should always consider life cover as per current liabilities such as loans, child’s education, wedding expenses, retirement needs and so on," said Chatterjee.

Financial planners recommend going for a sum assured of at least 10-12 times your annual income.

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