Term Life Insurance is a kind of life insurance that offers a specific coverage amount for a particular time period. In case of death of the insured during the specified time period while the policy is active, the death benefit is received by the nominee. If the insured dies after the expiry of the specified period, no coverage is paid. Term life insurance is less expensive than permanent life insurance as a term life policy does not have any cash value. As most of the term life insurance policies expire before the need to pay death benefit arises, so the risk associated with these plans is less than permanent plans. This is the reason the term life insurance premiums charged to customers are cheaper.
Term Life Insurance Premium is majorly dependent on the mortality rate. The cost of a term life insurance is calculated by adding the following three components:
- Cost of building up the plan
- Insurance Company’s Profit margin
- Mortality Experience
Therefore, the mortality rate needs to be calculated properly, which in India is still based on assumptions which are being presently challenged.
Role of reinsurers in deciding the Term Life Insurance Premium:
The term life insurance premium is decided by the reinsurers. Reinsurers are companies that give the insurers financial support. They take care of the risk associated with a policy. The reinsurers being the ultimate risk-owners, the premium on term life insurance is decided by the reinsurers after discussing with the insurance companies. The price decided by the reinsurer is final and the same is offered to the customers.
Following causes have forced insurance companies to increase the premiums on term life insurance:-
- The Mortality rate at present is based on assumptions that are being challenged now. The mortality rate data is presently considered by the insurers keeping in mind the affluent part of the population who are the high- income section have better reach towards health facilities. This mortality rate is considered to be around 1/4th of the death of the average Indian population. Since the mortality rate of this section of the population is low so the premium charged on the basis of this data is also low. So, this assumption and the related term life insurance premium needs a correction.
- Affluent people are more comfortable with online purchase of term plans. The online premiums of term life plans are lower because the premium rates on online plans are fixed considering the mortality rate to be around 1/5th of the average customer of India. This assumption is based on the fact that the life expectancy of the affluent online customers is better. The premium rates of offline term life insurance are more than online because 1/3rd of the average Indian population is considered as the mortality rate for offline non-affluent customers.
- The reinsurers have now started feeling that the assumptions on which the mortality rate data is based are very unreal because the number of claims is increasing day by day. So, the Indian, as well as worldwide reinsurers, want to take a step to increase the premium rates.
- If the reinsurers increase the premiums the insurers will have to do the same because the reinsurers are the actual risk-takers of the policies and their decision is the final.
- The insurance companies have to choose between lowering their profit margins or increasing the premium rates on the term life plans. As the insurers cannot continue in the market by lowering their profit margins on a long-term basis, therefore they will be forced to increase the premium rates charged from the customers.
- The premium rates in India are lower than in other countries like the US, Singapore, Dubai. Therefore, the present prices of term life plans are lower in India and are unsustainable.
- All key brands will do a premium rate revision in the next 3 to 12 months.
Effect of Increase in Term Life Insurance premium:
- The Term life insurance premium on plans purchased before this increase will remain the same. So, customers purchasing before the revision will not get affected and thus, will pay a lower price for their product.
- After the premium rate revision both online and offline prices will be affected. Term life insurance premium paid on the online purchase is always lower than that paid on the offline purchase. The difference between online and offline prices will continue.
By paying the Term insurance premium you can ensure to take care of the financial needs of your family in your absence. Looking at the future premium revision you are advised not to avoid buying your term life plan. Instead, you should purchase your term life plan prior to the price revision if you want to enjoy the lower premium rates charged at present. If you plan to buy your term life plan after the premium revision, then you must go through the terms and conditions of the plans properly to choose the best suitable plan for yourself.