Life insurers in India are looking ahead to increase the Insurance premium rates. The term life insurance rates may see an increase of 15-20% from April because of an increase in reinsurance cost. So, it would become more difficult to buy a term insurance plan after such a premium rate increase. However, as the premiums on medically underwritten policies are comparatively lower, the insurance companies in all probability will insist on the customers for health checks.
What are medically underwritten policies?
Medically underwritten policies are policies that are purchased through a process under which the customers are required to go through medical checks before buying a policy. The insurer takes into account the medical history of the customer and all the health factors before deciding on whether to offer a policy to the customer and if offered then what premium needs to be charged on the policy of the customer.
What is the cost of reinsurance?
Reinsurance is the process under which an entity called the reinsurer takes up all or a part of the risk of major claim events of policies issued by the insurer. The reinsurers are thus, the ultimate risk-owners. Therefore, the reinsurer has the ultimate decision-making power of the premium rate to be charged on a term life plan. The premium rate decided by the reinsurer is offered to the customer. Reinsurance is thus a form of purchasing insurance coverage by the insurance company from the reinsurer by paying a premium (reinsurance cost).
Term Life Insurance is a type of life insurance that gives a coverage amount for a specific time period. It compensates the nominee with a death benefit offered in case of death of the insured during the specified time period. No, survival benefits are received on such policy.
The premium on a term Life Insurance is most importantly dependent on the mortality rate. The cost of a term life insurance is the addition of the following three things:
- Cost of building the plan
- Mortality Experience
- A profit margin of the Insurance company
Thus, the mortality rate calculation in India needs to be changed, which is based on assumptions that are being challenged.
Why will insurance companies increase the term rates for life insurance policies?
Following are the reasons for insurers looking to increase the premiums on term life insurance:-
- The Mortality rate at present is based on assumptions considering the high-income affluent section of the population. The affluent section of the population is in a financially better position to take care of their medical needs. Thus, the mortality rate of this part of the population is very low and is assumed to be around 1/4th of the death of the average Indian population. As the mortality rate is low so the premium charged on such unreal assumption is also low. So, this assumption needs to be corrected.
- Insurers in India have also accepted policies without any health checks, based on their assumption that affluent people are in a better financial position to take care of their medical needs and thus have a lower mortality rate.
- Affluent people are more internet savvy. The premiums of term life plans charged on online purchased plans are lower because they are fixed assuming the mortality rate to be around 1/5th of the average population of India as the mortality rate of affluent customers is lower. The premium rates of offline term life insurance are higher than online purchased term plans as for the offline customers who are non-affluent, 1/3rd of the average Indian population is assumed as the mortality.
- The assumptions on which mortality experience data is based are very unreal as day by day the number of claims is showing an increase. So, the reinsurers want to reduce their risk by increasing the premium rates.
- As the premium rate decision taken by the reinsurer is final, so the insurers will have to increase the premium rates on insurance policies, if the reinsurers want to increase the price.
- The insurance companies need to decide between decreasing their profit margins or increasing the premium rates on the term life policies. As it is difficult to continue on a long-term basis in the market by lowering the profit margins, therefore they will be forced to increase the premium rates on term life plans charged from the customers.
- The premium rates in India are presently the same as in UK and US and lower than in Singapore, Dubai. Thus, the prices of term life plans in India at present are relatively lower and are unsustainable. Term insurance policies of up to Rs 1 crore have been sold for rates as less as Rs 6,000.
Effect of increase in the Insurance premiums:
- The premiums on term life plans purchased before this increase in rates will remain the same. So, if customers purchase life insurance policies before the price correction, they will pay a lower premium on their product.
- Both the online and offline prices of term plans will increase. Online purchase of term life insurance premium paid always attract lower premiums than that on offline purchase. So, the difference between online and offline premium rates will continue.
- As the reinsurers charge relatively a higher premium on policies issued without health checks as compared to policies with health checks, so the companies will increase medical underwriting policies.
- To ensure the customers can go through this medical check process without much hassle the companies have provided the options of scheduling online health checks and link the checks done by the third party on the system of the insurance company.
Term life insurance ensures keep your family away from any financial burden in your absence. Keeping the coronavirus pandemic situation in mind, insurance has become more crucial. So, it is not at all wise to avoid purchasing term life plans looking at the premium rate increase in a few days. Instead, you must take advantage of purchasing medically underwritten policies with relatively lower premium rates which are beneficial to you as well as the insurance companies.