If you are planning to buy a term insurance plan, you should purchase it by March 31 as prices are expected to increase in the new Financial Year starting from April 1, 2021. According to PolicyX Founder and CEO Naval Goel, an increase of 20 per cent in life cover prices is expected in the new Financial Year.
Goel told FE Online that the percentage may differ from company to company and their plans. There are other factors such as gender, age group, income and etc which will also affect the life cover prices premium.
Why term insurance plan prices are expected to increase
Dhirendra Mahyavanshi, Co-Founder, Turtlemint, said increased claim incidence in 2020 due to COVID, as well as increased co-morbidities among individuals, has driven reinsurers to revise their rates. With the rise in mortality risks, reinsurers have been forced to increase their premium rates on pure protection insurance plans. Since life insurance companies get their policies reinsured, the hike in premium by the reinsurers has also put a heavy strain on the life insurers as well. Thus, term life cover prices are expected to increase in Financial Year 2022.
The Turtlemint co-founder said that the increase in term insurance rates can range between 10% and 15%. Many reinsurers had already hiked their premium rates at the start of 2021 and the others are expected to follow suit by April 2021.
“Last year, the insurance companies had increased their basic term insurance rates by 25% to 30% following a high claim volume. They were unable to sustain at the rate at which they had operated since the mortality risk had gone up. Now, as reinsurers have revised their rates, life insurance companies are likely to increase the term insurance premiums again as they would find it difficult to underwrite lives at existing premium rates. This would lead to a hike in Term Insurance premium again in 2021 of about 10-15% in the upcoming months, and can even go up to a maximum of 40%,” Mahyavanshi told FE Online.
Akshay Dhand, Appointed Actuary at Canara HSBC Oriental Bank Of Commerce Life Insurance, said over the years, the term rates had become significantly lower owing to stiff competition between insurers and pressure from web aggregators and other insurance intermediaries.
“However, as the customer base for these products widened, there has been a deterioration in the actual mortality rate of these products versus what they were priced at. This prompted to the reinsurers, who were retaining bulk of the risk under these products, to raise rates at the beginning of the last year. However, a number of companies had not increased their own rates or only partially increased their rates as they were watching the reaction of the market. Nevertheless, it was apparent that these companies would have had to increase their rates at some stage and that is what we are likely to witness in the coming year. In addition, the experience has further deteriorated over last year and it is likely that there is going to be another revision of reinsurance rates this year. How much of that increase will get passed on to customers and the timing of the same remains to the seen,” Dhand told FE Online.
How will policy premiums increase from April 1, 2021?
Casparus Kromhout, MD and CEO, Shriram Life Insurance, said Companies decide on premiums based on the mortality table and the company’s risk assessment. These also depend on how much of the additional cost increase the company is ready to absorb and how much are they ready to pass on to the customer.
Goel said that there will be a significant increase in policy premium if life cover prices increase by 20 per cent. “For instance, for a Male about 30 years of age, if the annual premium comes around Rs. 10,000 but after the hike it would cost Rs. 12,000 annually. And supposedly, if the policy is to be paid for 40 years of duration then the total hike would be of Rs. 80,000 annually,” said Goel.
Akshay Dhand explained that the actual increase in policy premium will vary from company to company as it will critically depend upon how competitive their rates were in the first place as well as how much they have increased their rates by over the last year.
“For instance, if a company was very competitive and has not changed their rates at all over last year, the increase can be as high as 50% whereas if they had already increased their rates by say 25% last year, then the increase may be limited to 15%-20%. It is important to note that the actual rate increase which will be affected by companies will also depend upon their strategy and how much business they actually write or would be writing in this segment,” said Dhand.
“For instance, if a company write immaterial proportions of term business, they may not bother changing rates at all or only change rates to a minimal extent as it gives them the marketing edge of being cheap without denting their financials. Similarly, a company might decide that it is strategically important for them to retain their competitive edge in this space and might continue incurring losses on the term business (by not changing rates or changing to a lesser extent) and cross-subsidizing the same with profits from other lines of businesses that they write,” he added.
Mahyavanshi also said that there is no fixed rule or guideline for the high policy premiums. However, there is an estimate that the policy premiums would become more expensive by 10% to 15%. This is purely due to the increase in mortality risk premiums by the reinsurers.
“Moreover, underwriting norms are also set to become more strict and standardized to ensure that the insurance companies assess the mortality risks thoroughly, in order to avoid high claim volumes and face subsequent losses. In case of tele-underwriting or underwriting for telemedicine, underwriters could request additional documentation such as income proof, proof of medical check-ups, etc. before issuing the policy to the individual. Thus, stricter underwriting norms and higher premiums would limit the losses of the insurance companies. This would help them to pay the higher risk premium to the reinsurers without affecting their profitability and sustenance,” he said.
Will term life cover price increase impact existing policyholders?
All the experts agree that there will not be any impact on the existing policyholder. The increased prices will be applicable only to the existing policyholders.
“No, it will not affect the existing policyholders who already have a term policy or buy before 31st March 202. The increased prices are applicable only to the new customers who buy term insurance post this financial year. And of course, people looking to buy in FY 22 will have to pay the following the new rates,” said Goel.
Mahyavanshi also said that the impact of the rise in term insurance premiums would affect only the new policyholders. This is because, term insurance premiums do not change after the policy has been issued, unless there has been a change in the terms and conditions like a rise in sum assured, addition/deletion of any additional benefit, etc.
“Thus, if a policyholder has an existing term insurance plan, his premium would not get affected by this rise in premium. The impact of the increased premiums would be felt by new policyholders opting for a fresh term insurance plan in the financial year 2021-22 especially those who suffer from comorbidities. This is because smokers and others with comorbidities would have a higher increase in premium than before with this rise in rates. Even people from the informal sector or self-employed individuals who do not have any formal income proofs or income tax return statements to support their income might have to face a severe rise in premium as a non-standard case. In fact, many insurance companies have already filed new term insurance plans with the IRDAI (Insurance Regulatory and Development Authority of India) that reflect the increased rates of premiums with some changes in benefits as well,” Mahyavanshi explained.
Should you buy term life cover before March 31 and why?
Experts said that buying the term plan before March 31 will benefit policyholders.
“Certainly it is always advisable to buy Term Policy as early as possible. The basic idea of Term Insurance is to offer financial coverage to the claimant in return for a premium amount, which is directly linked with the age of the policyholder. It means, the later you opt for a term plan, the higher premium you have to pay. The companies have announced the hike of close to 20% approx which will be applicable from the 1st April 2021 so buyers can save at least 20% of an additional cost however, the exceeding amount varies from company to company and the nature of investment,” said Goel.
Mahyavanshi said that if you do not have a term insurance policy or have been planning to opt for another one, it is recommended to buy the policy before the current financial year ends, i.e. before 31st March 2021. You would be able to buy the policy at the existing rate of premium. As reinsurance contracts are reviewed between January and April, any premium increase would be reflected from April 2021, i.e. from the next financial year.
“So, if you buy a policy before 31st March 2021, you might be able to save the 10% to 15% increase in premium that is expected to come in the next financial year. This is because, once you buy a term insurance plan for say Rs 1 crore for 35 years and start paying a premium, it gets locked for life and does not change even if the insurers or the reinsurers choose to rate up their premiums and costs further. Only your tax portion may get affected if the tax applicability changes, but not otherwise. Hence, it is always best to buy a term insurance plan at the earliest, but in March 2021, it makes even more sense to save that extra amount for life!” Mahyavanshi concluded.