Term Insurance Becoming More Expensive: Here’s why

Term Insurance Plan is a type of life insurance cover that provides a specific amount of coverage for a specific time period. The death benefit is payable on such a plan in case of the untimely death of the insured during the time period of the policy, to secure the financial needs of the family of the insured. The policyholder needs to pay a premium to buy term insurance policies which are lower as compared to other life insurance policies prevailing in the market. Premiums offered by different insurance companies may vary, so the customer has the option to choose the insurer whom he finds suitable to meet his financial needs. The customer also has the option of buying his term plans online or offline as per his comfort.

Why are term insurance plans so appealing?

Term insurance plans are more attractive than other types of life insurance policies because of the low premiums charged on buying term insurance policies. The premiums on term plans are low because of the absence of any investment component and because of the fact that the premium paid entirely goes into paying the coverage benefit to the insurer. Different companies have different premium rates and customers obviously prefer to choose the insurer who provides a reasonable, pocket-friendly premium rate. 

Cost of a term insurance plan

The Cost of a term insurance policy depends highly on the mortality rate. The mortality rate is the rate of death of people of a population against the size of the population over a specific time period. This mortality experience data is collected over time and is used to determine the cost of a term plan. 

The cost of a term plan is made up of three components: the cost of building up the plan + profit margin of the insurance company + mortality experience.

Who decides the price of term insurance plans?

The price of a term insurance plan is decided by the reinsurers. Reinsurers are entities who provide financial support to the insurers and takes care of the risk covered under a policy sold by the insurance company in exchange of premium paid on such policy by the policyholder. Since reinsurers are the ultimate risk-owners, so the cost of a term plan is decided by the reinsurer in consultation with the insurance company. The price declared by the reinsurer is the ultimate price of a term plan which is offered to the customer. Customer can bargain if he wants to stick to the same insurer or he can study and choose any other insurer with a more preferable price offer. 

Why is term insurance plan becoming expensive?

1. Presently, the mortality experience data considered by insurance companies for calculating the price of a term plan takes into account the mortality rate of the affluent section of the population. The affluent section of the population have a better access to medical facilities as they are the high income group of people. So obviously, the life expectancy of these affluent people is high. Thus, when this mortality experience data is used to determine the price of a term plan, the price charged is low.
2. The online prices of the term plans are always lower in price as compared to the offline plans because online customers belong to the affluent section of the population and therefore the price of the online term insurance is always cheaper.
3. Recently, the reinsurers have started feeling that the term insurance prices should be revised because they feel that the assumptions on which these mortality experience data are considered are very unreal. Insurers should consider the general population and not just the affluent population for the term plan price calculations.
4. One key reinsurer has already sent notices during the end of December to the insurance companies under it, giving a time of 90 days. So, the price revision may take effect by April this year.
5. The insurance companies have a very limited option now. They have to either lower their profit margins which they used to experience by selling these highly demanded term plans or the term insurance plan prices with the customers have to be increased. Since the insurance companies cannot sustain their market in future on reducing their margins so, ultimately the price for the customers will have to be increased.

Effect of increase in prices of term insurance plan:

1. Effect on prices of term plans bought in the past- Customers will not be affected by the increase in prices of the term insurance if they have purchased their product before such revision takes into effect. The premium paid for the term plans bought in the past will remain the same. Therefore, if you buy a plan before the price revision takes place, you do not need to pay a higher price for your plan.
2. Effect on online and offline prices of term plans- The price revision will affect both the online and offline prices. As we have understood that the online prices of term plans are always cheaper than offline plans, so the difference margin in prices will continue even after the price revision.

Conclusion:

Term Insurance Plan is a necessity in today’s date, should not be ignored. Looking at the price revision taking into effect very soon, customers are advised to buy term plans earlier to the price revision to enjoy the benefit of lower prices at present.