Embedded value: Align policy term with rising life expectancy

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October 30, 2020 1:00 AM

A life insurance policy has to fulfil the needs that arise not only due to premature death but also due to prolonged existence

The term of a policy is the duration for which a buyer of a policy seeks to obtain risk cover for protection of his or her loved ones or for meeting financial liabilities.The term of a policy is the duration for which a buyer of a policy seeks to obtain risk cover for protection of his or her loved ones or for meeting financial liabilities.

In theory the term of a life insurance policy ought to be directly proportionate to the range of life expectancy in a particular community or market. But in practice life insurance policies are sold taking into account all factors such as affordability and short to mid-term financial commitments except the average life expectancy and consequential contingencies.

In India, improving average life expectancy has been directly impacting the need for insurance up to an age far beyond the age of retirement, demanding urgent review of the factors necessary for the determination of the term of a life insurance policy. The term of a policy is the duration for which a buyer of a policy seeks to obtain risk cover for protection of his or her loved ones or for meeting financial liabilities. According to the latest report of the Sample Registration Survey (SRS) released by the Registrar General of India for the period 2013-17, Indians have registered further improvement in average life expectancy at birth. Now it is 69 years for men and 70.4 years for women.

The average life expectancy among the working class staying in urban areas is much higher than the national average. This throws up a challenge for life insurers as they are expected to provide for life cover till the age a person needs it for himself and his dependents. Generally, term insurance is bought with tenure of 25 to 30 years by the youth. This results in the policy maturing at an age below even the normal retirement date when most of the financial liabilities continue to exist. Very rarely people buy endowment policies for more than 30 years.

The intermediaries canvas short term plans with considerably high premium, mostly to satisfy their own interest. In fact, the buying process doesn’t take into account the need as well as the advantages of buying long-term policies. As the term of a policy increases, the instalment premium decreases making a high sum assured policy affordable. Alternatively, the proposer may get double of the risk cover with the same premium instalment.

Increasing term of the policy
Increasing the term of the policy also results in attachment of higher bonus each year to the policy. Bonus under the endowment type policies, including the Money Back plans, is paid on the basis of sum assured and not on the basis of the amount of premium paid every year. Bonus accrues annually and if the term of a policy is long it is very likely that the accrued bonus would be well above the sum assured itself. All these benefits translate into a much higher amount payable to the claimants in cases of unfortunate death of the life assured as well as when the policy matures.

Prospective customers therefore must start looking at the insurance solutions as a long-term financial tool to meet a variety of needs that arise not only due to premature death but also due to prolonged existence. The demographic and lifestyle changes as well as the weakening of family as a support unit and health care needs create challenging situations even during advanced age. Such changes call for rationalising and aligning the benefits of insurance to the new normal.

Therefore both the buyers as well as the seller of life insurance must review the USPs of the products and shift to long to very long-term cover so that the protection is available to a policyholder till the time he or she would need it.

Neither of them can afford to ignore that insurance costs more with increase in age and gives lower return during a shorter term. So much so that beyond certain age buying insurance becomes unaffordable and one is obliged to live without the financial protection that a policy provides. One must think twice before choosing the term of a policy one intends to buy.

The writer is former MD & CEO, Star Union Dai-ichi Life

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