Your Term Insurance Premium is All Set to Increase. Here’s Why?

October 9, 2021 Mutual Fund

Term insurance is the purest form of life insurance as it does the exact job what life insurance is supposed to do i.e. providing financial assistance to the family by replacing the lost income due to the unfortunate demise of the policyholder or the bread earner. As the name suggests, a term insurance plan provides a death benefit for a specific term and does not offer any survival benefit. It is the best choice for most individuals as it is design to provide maximum coverage at an affordable premium.

Here are some of the features/benefits of Term Life Insurance:

• The term life insurance policy ensures financial stability of the dependents in case of an unfortunate demise of the policyholder.

• The coverage is provided for a fixed period of time and at a fixed premium amount.

• The premiums paid for the term plan are tax-free up to Rs 1,50,000 under section 80 (C) of the Income Tax Act, 1961.

• A policyholder can choose from payout options, such as lump sum payout or monthly income to his/her dependents as available under the policy.

• A policyholder can choose from various useful riders and add-ons as per his/her requirements. Some of the riders are, Accidental Death Benefit, Critical Illnesses Cover, Accidental Disability Rider, Waiver of Premium, Option to Increase Death Benefit, etc.

• Term life insurance provides only death benefit (unless you have opted for specific riders or add-ons). It does not have a cash value and does not provide a survival benefit to the policyholder like whole life insurance plans, such as money-back policy, endowment policy, etc.

As we know, the term insurance provides coverage for a specific period as chosen by the insured, where the policy ends at the end of the term. An insured has to buy a separate term insurance policy for a new term if he/she wishes to continue the insurance coverage. Although buying a new plan is usually hassle-free, your term insurance premium increases substantially with an age. Therefore, it is vital to buy a term life insurance policy for a longer period.

We have seen a steep increase in the life insurance premiums in the last year – 2020. This rise in the premiums was due to an expected high death ratio because of the COVID-19. Most insurance companies had increased their term life insurance premium by up to 20%. And, term life insurance premiums are likely to increase again in FY 2022, with a total increase in the premium by up to 40% of what we are paying currently.

Why is the rise in the life insurance premium expected?

The insurance companies get financial protection from a reinsurer. These reinsurers are basically companies that handle the risks that are too large for the insurance companies to handle on their own. With this assistance, the insurance companies can obtain business opportunities that would otherwise be impossible for them. Recently, the reinsurers have increased their premiums to the insurance companies by 30% to 50% as the number of claims has been continuously rising due to the present COVID-19 pandemic. Therefore, insurance companies are expected to increase their premiums by at least 20% to 40%.

As some insurance companies have recently increased their premiums by up to 20%, they are expected to increase it again by up to 20%. Whereas, the insurance companies that have yet not increased the premiums are expected to increase it by up to 40%.

How is the Life Insurance Premium calculation done?

The reinsurers calculate the premium charged to insurance companies on the basis of the mortality rate and the expected number of claims. Based on the premium charged by the reinsurer, the insurance companies set their insurance premiums that is to be paid by the general public. All such changes are governed by the Insurance Regulatory and Development Authority of India (IRDAI).

Mortality Rate:

The mortality rate is the ratio between deaths and individuals in a specific population and during a specific time period. An increased mortality rate means an increased risk to the insurers and reinsurers. As it becomes an unfavourable situation for insurers and reinsurers, they ultimately increase the premiums.

Expected v/s Actual Claims:

The second important factor that affects the premium calculation is the actual v/s expected number of claims. If the actual number of claims is higher than the expected number of claims, the situation is considered unfavourable for the reinsurers and insurance companies. Hence, the reinsurers and subsequently insurance companies increase the premiums they charge to the general public.

Currently, both the factors, mortality rate and the expected v/s actual claims, have been providing a negative experience for reinsurers and insurance companies. The number of deaths that happened during the year 2020 and even till date in 2021 is much more than what was anticipated by reinsurers while calculating the premiums. Also, the number of claims is higher than what was expected by the experts, with claim amounting to Rs 1 Crore on average. This is resulting in an increased cost to both, the reinsurers and insurance companies. Therefore, to be in a favourable situation the reinsurers have increased the premiums.

Closing Remark:

Although there is an improvement in the pace of inoculations in the country, the COVID-19 has not completely vanished. Therefore, the cost to the reinsurers is still high, which has resulted in the recent rise in the premiums by reinsurers to the insurance companies. Now that the insurance companies are paying high premiums to the reinsurers, the insurance companies that have not increased the premiums recently, are expected to increase it by up to 40%. And, the insurance companies that have recently increased their premiums by up to 20% are expected to increase it further by the same percentage. Therefore, if you are planning to buy a term life insurance policy or considering to increase your insurance cover, it is advisable to buy a term life insurance policy as soon as possible. Remember, you are required to pay the same premium for the entire term of the policy. Hence, make sure you choose the proper term for your term life insurance policy. Furthermore, it is advisable to read all the policy-related documents, and terms & conditions before you buy the term insurance policy. Quick online research and comparison can help you get the best term insurance policy for a minimum premium.

This article first appeared on PersonalFN here