There is a trend that plays out every year without a miss. As the financial year draws to an end, sales of life insurance policies jump, as individuals rush to buy a term plan to protect their dear ones, keeping an eye on tax deduction such policies offer under section 80-C of Income-Tax Act.
If you are considering the same, you have another reason to act fast. The premium on term plan that has remained constant for the last five-six years is set to go north by up to 50 per cent. Life insurance companies have said they are in the process of reviewing the pricing and the hike may happen as early as April.
"Reinsurance premiums are getting revised in view of the claims/mortality experience. These rates are not revised yet and in all likelihood will have a bearing on protection plans' premium rates post march 2020. We are internally reviewing the best way forward," says Sanjay Tiwari, Director, Strategy at Exide Life Insurance.
Why prices are going up
Insurance companies share the coverage risk with reinsurance companies in order to reduce their losses in case a disaster happens and the number of claims see an exponential jump. In simpler words, reinsurance is insurance for insurers.
Since reinsurance companies are reworking on the premium rates for insurers, latter has no option but to revise the rates for customers. While the hike has not yet happened, reinsurers have notified the revised rates to insurers. "Lately reinsurers (largely) have been experiencing mortalities higher than that assumed in the premium calculation. This has made the current premium rates unviable. We are evaluating the revised rates. The application for customers will happen in the coming days," says Avdhesh Gupta, Appointed Actuary of Bajaj Allianz Life.
Santosh Agarwal, Chief Business Officer - Life Insurance, Policybazaar.com says premiums on term plans have not been revised in India for last five-six years. "Pricing in India is based on the assumptions, while it is fixed as per actual experience in the West. Some of the assumptions have not held up and this is the reason why prices are going up," she explains.
Below is the price comparison of a term insurance offered by three prominent insurers in India, US and Singapore. The comparison is for a 30-year old male non-smoker. Total sum assured considered is Rs 2 crore and the premium term chosen is 35 years.How do insurers fix premium?
The premium allocation is based on various factors such as age, mortality rate, annual income of an individual, reinsurance and company's expenses for operations and marketing. Insurance companies appoint actuaries to take a call on the same. Reinsurance plays a big role in fixing the premium. "The premium rates for individuals are highly influenced by what reinsurance companies charge insurers for an age band or demographic. Over the last few years, reinsurance market has been trying to correct the pricing based on the past mortality experience. It is important because if reinsurers start making losses, it'll lead to a major industry wide problem," says Jayesh Gadekar, Head-Health & Benefits, Global Insurance Broker.
How much hike may happen?
Agarwal expects price hike to be in the range of 15-20 per cent broadly. "Price hike could be different across insurers on the basis of their computation of mortality rate. For some it could go as high as 40 per cent also."
The outbreak of coronavirus may also influence the final pricing. "Although Insurance companies were already planning to increase the premiums even before the outbreak of coronavirus, now the final hike may depend on its overall impact on the mortality rate. If the impact settles down soon, it won't have huge impact on the premiums, but if it doesn't settles down soon, chances are that premiums may see a hike of 25-50 per cent," says Rakesh Goyal, Director, Probus Insurance.
"The premium for the younger age won't see much hike, however, for the age group of above 40 years may see a hike of up to 30-50 per cent," he adds.
What else may change
Industry players point out that along with the price hike, underwriting norms will also see a revision.
"Underwriting conditions may get tighter, so not everyone will be eligible for competitive term insurance. Unemployed people or those not adequately educated may not be issued a policy or charged a higher premium. Companies might ask for more authentic proof of income and education. They might not accept proposal from certain geographical locations and medical tests may get mandatory for all to purchase a term plan," says Anilkumar Singh, Chief Actuarial Officer, Aditya Birla Sun Life Insurance.
Should you buy a policy now?
If you have family members who are dependent on your income, the best way to protect them financially is by buying a term insurance plan, which gives highest life cover at the lowest cost.
The amount of insurance coverage should depend on human life value calculated on the basis of need based or income replacement methods. You may consult a qualified financial advisor to find the exact amount of your life insurance need. You may also follow a thumb rule for back of the envelop calculation, that is, you should ideally have life insurance cover in the range of 10-15 times of your annual income. If you have additional big obligations such as housing loan you should add the outstanding amount to increase your life cover.
So, if you haven't bought a term plan yet, this is the best time to do so because premium on term plans remains the same throughout the policy tenure. Price hike will make no difference if you buy the policy before March 31. Note that if you buy the policy online, the premium is usually cheaper as online plans don't take into account operational and other overheads.