Life insurance premium rates are rising; select one at early age

Narrow down the list of prospective insurers to well-known players having strong claim settlement ratios, then select one offering lowest price

Major private sector life insurers like HDFC Life, ICICI Prudential, Bajaj Allianz and Max Life Insurance have hiked their term insurance premiums by 4 per cent to 7 per cent. Here are a few tips on how prospective buyers should deal with these hikes.

Claims experience of insurers is the usually biggest factor behind premium hikes. “Based on it, they have to keep revising the premiums periodically. They may revise the premiums themselves. Alternatively, their reinsurers may have increased the reinsurance premiums, after which insurers pass on the increase to customers,” says Mahavir Chopra, founder, Beshak.org.

Term premiums have been flat for a couple of years. “Premiums have to be revised periodically to reflect inflation and rising expenses,” says  Kapil Mehta, co-founder, SecureNow.

Interest rates are another factor. “The interest rate cycle is set to change. Interest rates are likely to come down soon. Even over the long term, there is likely to be a secular decline in interest rates. These developments will affect long-term interest rates, which are most relevant to insurers, and need to be factored into the pricing,” says Mehta.

Lock-in premiums 

The latest increase should not deter buyers from purchasing a term cover. “Even after the increase, term premiums in India are competitive compared to global standards,” says Chopra.

Some insurers may not have implemented the premium rate hikes yet. “If you apply for a term plan right away, you will be able to take advantage of the lower rates that are still available,” says Chopra.

For a Rs 1 crore term cover that costs, say, Rs 20,000, a 4-7 per cent increase would mean an increase in premium rates by Rs 800-1400. “Even if the hikes have already been implemented, customers should still buy a policy and lock in their premium at a young age,” says Chopra. Term premiums are lower at a younger age and higher at an older age. Once purchased, the premium remains constant throughout the tenure.

Compare premiums

First, narrow down the list of prospective insurers. “Select 8 or 10 well known players with strong claim settlement ratios. From them, pick the insurer offering the lowest price, since term insurance is a commodity product,” says Mehta.

Individuals who smoke or drink are charged higher premiums. “Giving up these habits and adopting a healthier lifestyle can help such buyers get better premium rates,” says Naval Goel, chief executive officer, PolicyX.

Mistakes to avoid

Select the sum assured carefully. “Instead of randomly purchasing a cover of ~1 or ~2 crore, evaluate the protection gap and then decide the sum assured,” says Chopra.

Term covers come with several riders. “Avoid the unnecessary ones as they will only push up the premium,” says Goel.

A term cover makes a payout only if the insured passes away during the policy tenure. Many customers feel that if they outlive this tenure, the premiums paid would go to waste. To satisfy them, insurers offer return-of-premium term plans. “Customers should avoid these plans. They will pay a premium that is 1.5-2x higher. Moreover, the amount returned at the end of the tenure will not be significant in inflation-adjusted terms. Instead, customers should go for a pure term plan and focus on buying an adequate sum assured that ensures their family’s financial safety,” says Chopra.

Having purchased a term plan, reevaluate it every five years. “Term plan rates are cyclical. There are periods when premium rates fall. If that happens, shift to a lower-cost plan,” says Mehta.

Goel warns against hiding crucial health-related information from the insurer.