Why are Premium Rates on Term Policies Skyrocketing?

Term insurance belongs to the group of life insurance products. It is specifically designed to offer a cover amount for a certain time period. This time period or term can be ten years, twenty years or even thirty years. 

If you have purchased a term insurance plan and unfortunately, you pass away while the term insurance plan is active, your family members will get the pre-decided cover amount as a death benefit. However, if your sudden demise does not take place during the policy term period, the policy will automatically expire. In such a case, your family members or beneficiaries will not be provided with any death benefit or large cover amount.

Term insurance policies or term insurance plans are some of the most widely common choices for life insurance. The reason it is popular is because these policies are usually quite reasonably priced as compared to other kinds of life insurance products, for example ‘while life insurance’. The premium amount for any term insurance policy or plan is generally dependent on the policyholder’s health and age. It is also dependent on the coverage amount chosen by the policyholder. 

The premium will remain level for the duration of the policy term, even if the health of the insured changes. Term insurance can be a good choice for someone who is looking for temporary life insurance coverage. For example, someone who is in their 20s and 30s and does not have dependents may only need life insurance for a few years. Once they have children or other dependents, they may want to consider a different type of life insurance, such as whole life insurance, which will provide coverage for their entire life.

Term insurance is also a good choice for someone who is looking for life insurance but does not want to pay the higher premiums associated with whole life insurance. The premium for term insurance is usually much lower than the premium for whole life insurance, and the coverage is typically for a shorter period of time.

While term insurance is less expensive than other types of life insurance, it is important to remember that it does not build cash value like whole life insurance does. Term life insurance is devoid of any type of cash value component.

However, we are noticing a sudden surge in the premium price of term insurance plans. Let’s look at the different reasons why term insurance prices are increasing by the day in India.

Why Are Premium Rates Increasing?

The term insurance policies, that offer only life coverage along with zero possession of any investment element – are prospective to transform into expensive policies in the year 2022. The hike can be anywhere between ten percent to twenty percent this year. It’s natural for a common person to think and wonder why. 

The reason for this premium price hike is all about reinsurers. Reinsurers are insurance companies that provide coverage to other insurance companies. They help to spread the risk of losses and can provide additional capacity for insurers when needed. These reinsurers have reached a decision that it is required to boost their rates with the objective of sharing or dividing the underlying risks.

We have all gone through the horror of the Covid-19 waves during the pandemic for the past two years. During this Corona pandemic, many life insurance organizations observed that there was a sudden increase in the death claims at an extremely high level. Thereby, there was also quite a steep increase in the claim quantities from reinsurers. 

Let’s take an example of SBI – State Bank of India Life which is one of the many listed companies in the life insurance organization segment. State Bank of India Life observed that there was a rise of 74% in total death claims for the year 2020-21. Another very popular HDFC Life observed that during the fiscal year, payment in connection to death claims had a rise of 28%.

Most of the claims made on deaths were across different product groups. However, insurance organizations avoid re-insuring the underwriting perils considered pertaining to all products. It is important to note that since term insurance policies fall into the product category which deals with pure protection, they relatively offer a massive life coverage amount & that too at an extremely small cost.

Let’s take a practical example. A person can purchase an insurance which will provide him a cover of 1 Crore rupees and his premium will be as low as Rs. 8000/- to Rs. 13,000/- per year. This indicates that insurance organizations are undertaking a larger risk with regards to these policies. While doing so they divide the risk & share it with a particular reinsurance organization by incurring a specific fee.

The surge in death claims submitted and settled always means that reinsurer organizations have to make bigger payments pertaining to reinsurance to the respective insurance organizations. On the other hand, a surge in premium is also dependent on the claim settlement experience or claims ratio of the insurance organizations.

In a nutshell, factors like increasing death claims, covid-19 pandemic have forced insurance companies to take into account the mortality rate & future factors pertaining to macroeconomics. These are reasons because of which they have increased the premium price of term insurance policies.