Term insurance is critical, but focus on your need rather than price alone
Life insurers and their intermediaries are exhorting their prospective customers to buy term insurance policies before March 31, to escape the impending premium hike in April.
“Reinsurers are revising their rates due to stress in the business. This will lead to an increase of around 20 per cent in term rates from April 1, depending on the company and the policy,” says Anilkumar Singh, Chief Actuarial Officer, Aditya Birla Sunlife Insurance.
Hike on the horizon
While some life insurers might raise premiums in April, others could do it after two months, but a hike seems certain. “If someone is looking to buy a term cover, the right time to buy is now. The increase could be in the range of 20-30 per cent, depending on the insurer. Those in the older age-groups could see a sharper increase,” says Mohit Garg, Head, Products, PNB Metlife.
A term insurance policy is a pure protection cover that hands out the claim amount – the sum assured – to the policyholder’s dependents in case of her death. On the other hand, unit-linked insurance policies and endowment plans pay the maturity proceeds to the policyholder at the end of a specified tenure, besides offering a life cover, irrespective of whether you are alive, or not. Since term policies are pure risk covers, the premiums are affordable. For example, a 35-year-old non-smoker female buying a Rs 1-crore term cover for 25 years will have to pay as little as Rs 7,000-11,000 as annual premium, depending on the insurer chosen. “The term rates in India are currently at least 30 per cent lower than those in developed countries. So, the revision is an attempt at ensuring more appropriate pricing,” says Amit Garg, Term Insurance, Business Unit Head, Policybazaar.com
Not just premium revision
Then, there are other parameters that come into play. “Underwriting parameters – or factoring how much risk to assign to a policyholder – could turn more stringent as well. For example, companies could revisit the cut-offs for medical tests,” says Garg of Policybazaar.com. For example, someone whose income flow is irregular, unlike that of a salaried employee, might not be issued a policy or could be charged a higher premium. Similarly, prospective policyholders who have not completed graduation will also face greater scrutiny, as insurers tighten their underwriting norms and their implementation.
“The trigger for this possible price rise is that reinsurers felt the current rates were not sustainable. They were resulting in higher losses. The contention was that either risks were not assessed properly or were not priced adequately. So, underwriting criteria will be implemented more stringently going forward,” says Singh. In other words, buying a term cover might not as be as simple as it is now.
Focus on your needs
Since March 31 happens to be the last date for making tax-saving investments for the financial year 2019-20 and term premiums are cost-effective, many might be tempted to give in to the sales pitches. However, you must be watchful of pitches asking you to hurry and grab the ‘last chance.’
Financial planners recommend keeping the focus on your requirements, rather than premiums. If you are not adequately insured and are looking to buy a policy, it’s good to buy one as soon as possible, irrespective of premium rate revisions.
Else, figure out your requirement and add a term plan to your portfolio only if you are convinced that you are falling short. “Be it a life policy or any other product, the decision should always be taken as per your needs. Ideally, you should use the human life value (HLV) method to determine your life cover requirement. If that sounds complicated, adhere to the simple rule of thumb: your life cover should be at least ten times your annual income,” says financial planner Mrin Agarwal. The cover requirement will also be linked to your life-stage, dependents, their income profile, your liabilities and future goals. For instance, you must review and enhance your life cover once you get married, take a home loan or have children.Finally, while there is a lot of focus on premiums at the moment, never choose a policy only because it is cheaper. Instead, the claim settlement record – both in terms of policy count and benefit amount paid – should be the guiding factor. Claim settlement by benefit amount is critical if you are buying a high-value policy. The higher the claim ratio, the better are the chances of your insurer settling the claims . However, remember, after three policy years, the chances of claim rejection are virtually nil.
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