Articles 128 views February 20, 2020

Are Current Term Life Insurance Premium Prices in India Actually Unsustainable

The insurance business in India plays a vital role in developing the country’s economy. It significantly increases the chances for surplus among the individuals, protects their future and also helps the insurance segment to form a gigantic pool of reserves, like mutual funds. The insurance industry in the country has seen a major evolution in the last decade together with the formation of enormous advanced and innovative products. The insurance sector in India is categorized into 2 groups-namely Non-life which is the General Insurance and the second is Life Insurance and both of these are being administered and monitored by IRDAI – Insurance Regulatory and Development Authority of India.

Term Insurance

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Term Life Insurance is one of the most common products offered by almost all life insurance companies and is a pure insurance proposal at an inexpensive rate and nil investment opportunity. By opting for this plan and paying Term Life Insurance Premium, you ensure that your family does not suffer from any financial burden in your absence, as Term Plans will take care of the financial needs in case of any unfortunate incident. Now, let us go a little deeper to see whether the Term Life Insurance Premiums will remain the same or whether the same will undergo a correction shortly.

Lowest and affordable Term Life Insurance Premium

Term Life Insurance Premium is much lesser than other life insurance policies. For example, presently a 35 years old individual maybe buying a level term insurance plan of 30 years for INR 20 lakhs as the sum insured for just an annual premium of INR 5000. However, if he or she buys an endowment plan and the same is without profit component with precisely a similar death benefit, the premium may be INR 40,000 yearly. And, endowment plan with profit element, the premium may stand at yearly INR 50000. Hence, we can see how cheap Term Life Insurance Premium can be.

Factor affecting Term Life Insurance Premium

Mortality, as we all know that it the cost of insurance or can be explained simply, as the amount which is being charged by the insurer every year to provide the necessary protection to its policyholders. Term Life Insurance Premium is hugely dependant on the assumption that the mortality rate will be roughly about 1/4rth of the death or 25% death being seen for the average population in India. Interestingly, online Term Life Insurance Premium works with an assumption of 1/5th or a 20% rate for the average Indian policyholder. The difference is because individuals who are applying online are prosperous and wealthy, thereby with a better life span. While offline prices which are higher due to the involvement of intermediaries, the mortality rate assumed is 1/3rd or a 33% for the average Indian policyholder.

Assumption and reality in Term Life Insurance Premium

Now that we know the main factor which affects a Term Life Insurance Premium is the assumption of mortality rate as explained above, but in reality, this assumption is not working, as the number of claims is showing a rising trend day by day. Hence, Indian reinsurers, as well as the worldwide reinsurers, are thinking to take a conscious step of increasing the Term Life Insurance Premium. And quite naturally, if the reinsurers put forward a higher rate for all the life insurers, the insurance companies might be forced to revise their Term Life Insurance Premium. Reinsurers are the final risk owners of any Term Insurance agreement and thus fix the price or cost together with the insurer, which finally is being passed on to the buyer of the policy as premium for them to get the life coverage. Reinsurers provide monetary protection to the insurance companies and support them in mitigating the risks. Reinsurers are also are a major role in the company’s underwriting policies to acquire more insurance business.

Law of Risk and Probability

Any insurance business usually runs on two main principles which are risk and possibility or probability and the same can be determined by data and knowledge that is accessible to all the insurers about the target audience. The more correct the data is, the lesser is the risk with an accurate assessment of deaths. With a greater number of policyholders, the probability of the actual loss per policyholder will be equivalent to the anticipated loss per policyholder will be more.

Practically, this means that it is easy to determine the right premium thereby reducing the risk exposure for the insurer, as a greater number of policies will be issued within a specified insurance class. The insurance company will be in a better position by issuing 600 insurance policies rather than 180, with an assumption of a steady and self-regulating probability spread over for the company’s loss exposure. A very simple example can be taken here, assume that a life insurance company analyze and come up with a conclusion, that 10 out of 120 individuals will die during any year. Now, if the insurer insures only 20 or 35 individuals, the company faces far bigger risks than if it ensures all 120 people. The insurer will be more comfortable that 120 policyholders will be able to pay adequate premiums to give coverage to the claims which arise from those 10 policyholders who will die in that year.

Profitability of Insurers

Term Insurance is considered to be the most important source of cost-effectiveness with profitability for insurers in the long run and hence a change in the pricing of the said type of insurance by the reinsurers will have a direct impact on the Term Life Insurance Premium. And hence, insurers may surely want to raise the Term Life Insurance Premium, but they will be cautious too in doing so as there will be a risk too in losing the main chunk of customers due to this rise in the premium.

Conclusion

Thus, from the above discussion, we can conclude that we may see a substantial rise in the Term Life Insurance Premium and therefore you as a policyholder must go through all the policy details that suit your requirements the best, in terms of making your family financially protected and apply for the best term insurance plan in India.

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