Here’s Why Your Life Insurance Premium Would Increase from April 1

Apart from the fact that we were at an early stage of the COVID-19 pandemic then, the International reinsurance companies had expressed their concerns about lower premium rates in India compared to those in some developed markets, such as Europe, which have a higher life expectancy. Thus reinsurance companies revised their reinsurance premium rate card for Indian life insurance companies. Another factor behind the rise in reinsurance premium has been the reduction in interest rates. These are the primary reasons for life insurers hiking premiums.

The trouble actually started when some private life insurance companies adopted aggressive pricing practices, particularly in the case of a Term Plan to gain a higher market share.

State-owned Life Insurance behemoth, the Life Insurance Corporation of India (LIC) could not match the premiums of certain private life insurers and perhaps did not feel the necessity due to its brand equity and trust in the eyes of the populace. Now while private insurance companies are raising premiums of Term Plans, LIC has categorically stated to the press they will not raise premiums on its Term Plans. Perhaps given the scale, size, market share, trust, and robust underwriting processes followed, LIC has been able to successfully negotiate the terms with reinsurers better.

On February 10, 2021, the Insurance Regulatory and Development Authority of India (IRDA) published its annual report for FY20. It carried some data points pertinent to the discussion on the premium hikes by private insurance companies.

In FY20, LIC settled claims of Rs 2.50 lakh crore of which only 7% were death claims, worth Rs 17,505 crore. In the previous financial year as well, LIC had reported 7% death claims of the total claim settlement amount of Rs 2.49 lakh crore.

Against this, the mortality experience of private life insurance companies worsened. In FY20, private life insurers settled claims of Rs 97,916 crore versus the claims of Rs 80,393 crore in FY19. Moreover, the share of death claims in their total claims jumped from 12% to 13%. In FY20, private life insurers settled 1,15,933 death claims while LIC settled 7,58,916 claims. The average value of the claims settled by LIC has been just about Rs 2.3 lakh, whereas that of the private insurer, Rs 10.6 lakh. This goes to show that adverse mortality experience has affected private insurers more severely with the underwriting process perhaps being compromised.

Insurance agents, too, in the endeavour to do fast business and earn commissions, often do not enquire with their clients about their medical history and ensure that they state the medical facts in the proposal form. Withholding true medical facts is also the reason for the underwriting process being compromised. Even now, certain life insurance agents are not making the effort to understand the medical history of their prospective clients and rushing them into buying term life insurance arguing that from April 2021, the premium might increase.

In my view, when you buy a life insurance cover, as proposer or the insured, you should state all your medical history even it means a higher premium (due to a higher loading).

Further, stick to a Pure Term Plan---do not commingle insurance with investment. Insurance agents may take this opportunity to sell you more endowment or money-back plans, arguing that buying a pure Term Plan has become expensive. But the best strategy is to keep life insurance and investments separate. When you buy a life insurance cover, the sole objective should be to indemnify risk to your life as the breadwinner and safeguard the financial wellbeing of the dependent family members. And you should make sure you are opting for an adequate life insurance cover.

Now many of you may be in doubt about how much life insurance coverage should be enough. Say you are a 30-year-old person, as a rule of thumb, your life insurance coverage should be a minimum of 15-20 times your annual income. Remember, this is just a ballpark figure. A more scientific approach would be calculating your 'Human Life Value' (HLV). This approach will financially safeguard your dependent family members when you pass away.

The HLV calculation will determine your life insurance requirement taking into consideration:

• ✓ Your life expectancy based on your family medical history

• ✓ The life expectancy of your spouse

• ✓ Number of children

• ✓ How old the children are, and how many years they'll be dependent on you

• ✓ Total number of dependents

• ✓ The financial goals you're addressing for the dependents

• ✓ Your monthly household expenses (excluding your personal expenses)

• ✓ Lifestyle expenses

• ✓ Total expenses of dependents

• ✓ Contingency reserve (if any)

• ✓ The assets you own

• ✓ Your outstanding liabilities (if any)

• ✓ Current insurance (if any)

• ✓ The cost of inflation

• ✓ ...and many other finer aspects

After you have determined your Human Life Value, here are a few things you must check to zero in on the life insurance company:

• ✓ Promoters background of the life insurance company

• ✓ Number years of existence of the life insurance company

• ✓ Financial background of the insurer, where you need to gauge these factors:

  • Claims Settlement Ratio (CSR) - This will help you assess the percentage of claims settled, against the total claims lodged with the insurer (i.e. insurance company).

  • Solvency Ratio - This ratio reveals the strength of the balance sheet of the insurance company and its capability to settle insurance claims. It takes into account the net worth and the reserves and surplus held by the insurer.

  • Profitability Ratio - This ratio reveals whether the insurance company generates enough income for its stakeholders after meeting all the expenses (both operating as well as non-operating expenses). It helps you gauge the efficiency and effectiveness with which the insurance company is run.

• ✓ And last but not the least, read the terms and conditions carefully (the devil is in the fine print) before signing on the dotted line.

Note that having optimal life insurance coverage is an integral aspect of your financial planning. Thus, focus on buying an optimal life insurance cover without getting perturbed about the rising premiums of Term Plans.

Happy Insurance Planning!

Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter

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