BT Buzz: Your term plan premium just got dearer. No, it's not due to coronavirus

The coronavirus pandemic has made many realise the importance for having a term insurance plan that can protect your loved ones financially in case of an unfortunate event. Often it is seen that people buy life insurance policies to take tax deduction under section 80-C of I-T Act. However, the pandemic has brought in a change with millennials buying term plans for its main purpose, that is, to ensure financial protection for your family if you are no more.

The realisation, nevertheless, is coming at a time when term plans are becoming expensive. While some insurers have already hiked the premium by up to 40 per cent in April, others may do it in next few months. "Pure protection term plans including the ones from prominent insurers such as HDFC Life, Max Life and Tata AIA have witnessed a price hike between 20-35 per cent in the month of April. ICICI Prudential Life has increased it by up 40 per cent," says Santosh Agarwal, Chief Business Officer, Life Insurance, Policybazaar.com.

It's important to mention that the hike is not on account of coronavirus-linked rising mortality, but was imminent even before the pandemic gripped the country. The current hike is due to reinsurers, who insure the insurance companies, having hiked the premiums for insurers.

"The term insurance premium calculation depends upon mortality rate and expected claims. Due to the increased mortality rate, reinsurers have increased the term insurance premium by 30-50 percent due to which the present rate of premium charges is not sufficient for insurers to offer the required coverage," says Naval Goel, CEO & Founder of PolicyX.com.

Suresh Badami - Executive Director, HDFC Life points out that premium rates on protection plans in India have been fairly low compared to the rest of the markets across the world. The company has hiked the premium in April, and may do it again going forward. "There has been an increase in our rates but it should be noted that our prices are based on our previous mortality experience across customer segments. This will be dynamic as our term products need to be priced competitively and we look for growth while keeping in mind profitability and risk," Badami says.

Let's understand why reinsurance firms have hiked the premium:

Reinsurance firms are the insurer for insurance firms. Latter share the protection risk with reinsurance firms in case a disaster happens and claims go up by a wide margin. Earlier in the year around January, reinsurers had taken into account the rising mortality against the premium charged and had notified the insurance companies about the imminent hike in the premium.

"In order to determine term insurance premiums by the reinsurers, it has been assumed that for every 10,000 lives covered under term insurance plans, only 3 deaths would occur in each policy year. While the expected number is 3, the actual deaths per 10,000 policies issued in a policy year are between 4 and 4.5. To add to the reinsurer woes, the claim amount is massive in case of term insurance with an average policy sum assured of around Rs 1 crore. In the ideal case scenario, the actual vs expected ratio should be around 1. This is clearly not the case in India, with the ratio being more than expected leading to a negative experience in mortality. This situation has led to revisions in the term insurance premiums by 40 per cent, as demanded by the re-insurers," explains Agarwal of Policybazaar.

Since premium rates for individuals get influenced by what reinsurance companies charge insurers for an age band or demography, insurance companies need to pass on the hike to consumers to be able to provide insurance coverage. In the wake of COVID-19 liquidity challenges, some insurers have refrained from passing on the full hike to consumers, while others have not done it fully. However, in all likelihood, the rest of them will do so over the next few months.

So, if you have not bought a term plan yet, make sure you buy it as soon as possible because premium on term plans typically remains the same throughout the policy tenure.

"Even though there will be a hike in the coming months, people need to understand that such products are really important and become more essential if you have dependents. You don't need to get worked up about slightly higher premiums," advises Goel of PolicyX.com.

How to reduce your premium?

There are some ways to reduce your premium burden. For example, if you buy a term plan online, the premium rate will be lower compared to the same plan bought physically. Besides, committing to pay full amount of premium in the initial years of policy tenure will help you get some discount. "Pricing for term plans are roughly cheaper by 10 per cent for online purchase compared to offline. Also, if the customer chooses to pay the premiums in a shorter duration, for example, if the policy tenure for a plan is 40 years and the policyholder decides to pay the entire premium during the first 10 years itself, he may get a discount on the premium instalments," says Agarwal of Policybazaar.

Besides, you may get some discount on renewing the policy if you maintain a healthy lifestyle. For example, most insurers offer footstep-based discounts via their apps. Star Health, Max Bupa, and Kotak Mahindra General Insurance have, in fact, got approvals for specific wearable devices under sandboxing that will track your health and accordingly offer you discounts. Enquire about such discounts when you buy a policy.