What the hike in term insurance premiums means for policyholders?

Many life insurance companies have hiked their term insurance plan premiums by up to 50%. This article discusses why insurance companies had to resort to such a massive hike, the impact on policyholders, and how to deal with this situation.

Term insurance premiums have increased by up to 50%. What should you do now

During FY 2021, most life insurance companies increased the premiums for their term insurance plans. This hike has come on the back of adverse claim experiences. The number of death claims settled by life insurance companies in the first half of FY 2022 is much higher than what was settled during the same period in the previous financial years.

Chart: Death claims settled by life insurance companies

Death claims settled by life insurance companies

The above chart reveals that the number of death claims settled has been gradually rising year-on-year. In FY 2022, the number of death claims settled suddenly doubled compared to the previous year. The devastating second wave of COVID-19 clearly induced a spike in death claims.

Due to adverse claim experiences, reinsurance companies have increased the reinsurance rates for life insurance companies by up to 50%. The increase in reinsurance rates for individual life insurance companies depends on the claim experience of each company. When this hike occurred, life insurance companies had two options:

a) Pass on the hike to their customers by increasing the term plan premiums, or
b) Absorb the hike in reinsurance rates for protection solutions on their books which will put pressure on their margins and profitability

Life insurance companies have chosen a combination of both. They have passed on part of the hike to their consumers and retained some on their books. Some life insurance companies even negotiated with reinsurance companies to reduce a quantum of the premium hikes.

Also Read: Should Housewives Buy Term insurance?

Impact of hike in term insurance premiums on customers

In FY 2022, due to the impact of COVID-19, many customers are facing these twin challenges:

a) Reduction in income due to job losses, pay cuts, or delays in receiving income
b) Increase in term insurance premium at a time when buying life and health insurance is inevitable due to the pandemic

Looking at the number of people who suffered from COVID-19 and its financial consequences, many individuals have realised the importance of life and health insurance. So, they have done one of the following:

a) Individuals who didn’t have life insurance have gone ahead and bought it
b) Individuals who already had life insurance have reviewed their existing cover (sum assured) and bought additional cover if they were under-insured.

How have Indians handled the hike in insurance premiums?

If you had already bought a term insurance plan before the hike in premiums came into effect, you need not worry. For existing policyholders, their premium will continue to remain the same. The new pricing will impact only new customers who buy a term plan after the hike in premiums came into effect.

In early 2022, SBI Life Insurance released the SBI Life Financial Immunity Survey 2.0 findings. As per the survey results, 78% of Indians feel that insurance is an important part of their financial planning journey.

Chart: Importance of insurance for Indians

Importance of insurance for Indians

The above chart shows how 78% of Indians consider insurance an extremely important part of their overall financial planning process. Despite the hike in term insurance premiums, 44% of Indians have gone ahead and bought insurance products for the first time. So, it’s obvious that the pandemic has increased health awareness among the public.

Insurance plans, specifically term plans, are no longer looked upon as mere tax-saving financial products. In the case of many people who contracted COVID-19 and perished, their families have borne the brunt of the family breadwinner either not having life insurance at all or having an inadequate amount of life insurance.

Also Read: Easy Ways To Buy A Term Life Insurance Policy

Indians are grossly under-insured

The SBI Life Financial Immunity Survey 2.0 Report also highlighted the fact that even though Indians feel insurance is important, they are grossly under-insured. As per the report, the average life cover of Indians is only 3.8 times their annual income. The cover is way below the ideal 10-25 times one’s annual income.

Chart: Average life insurance cover

Average life insurance cover

The above chart shows that 73% of the surveyed population has life insurance cover less than five times their annual income. The overall life cover to annual income ratio is just 3.8x times, which is much lower than the required 10x-25x times. A term insurance plan is the most cost-effective product over the long term that provides a higher death benefit at a low cost.

How prepared are Indians to deal with the hike in term insurance premiums?
SBI Life Financial Immunity Survey 2.0 highlights that Indians are setting aside 50% of their income to build financial immunity through savings, investments, and insurance.

Chart: Monthly income allocation of Indians during COVID-19

Monthly income allocation

The above chart shows how Indians allocate 50% of their income towards regular monthly expenses and the remaining 50% to build financial immunity. Of this 50%, 15.7% goes towards paying premiums for life and health insurance.

Also Read: Plus And Minus Points Of Term Life Insurance And When Should You Buy It

How should one deal with the term insurance premium hike?

As part of the financial planning process, after building an emergency fund to cover 3-6 months’ expenses, the next step is to buy term life insurance for family breadwinners and health insurance for the entire family. Hence, it is essential for you to buy a term life insurance plan if you haven't already done so.

The hike in premiums will strain your pocket a little more, but it is still absolutely worth buying a term insurance plan. It is better to bear a little additional burden now for your family's financial security rather than leaving them in a permanent financial quagmire after you are gone. So, if you are still thinking, think no more. Please go ahead and purchase a term plan immediately.

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