Buy term insurance now as rates may rise from April 1

The premiums for term insurance products may go up by 15-20 percent from April 1 as reinsurance rates for these policies have been revised. The hike is significant since term premiums have stayed more or less constant for the past five to six years.

Term insurance refers to protection plans where the sum assured is paid only in the case of the death of the policyholder during the policy term.

Sources, however, said that customers of the Life Insurance Corporation of India (LIC) are expected to be the least hit since the insurer is looking to absorb the additional cost. 

Reinsurance premiums are paid by insurance companies for buying a cover against providing protection for large risks. When the reinsurers hike rates, this is immediately passed on to customers in the form of premium hike.

"Reinsurers have said that the current term insurance plans are unviable considering that claim pay-outs have gone up. While negotiations are on, the premium hike will be passed on to customers from FY21," the appointed actuary at a mid-sized private life insurer said.

As of now, protection plans offer the best margins as far as life insurance is concerned. Hence, a majority of insurers have shifted their business mix towards these products.

Term plans’ share in the annualised premium equivalent for life insurers has gone up from less than 5 percent about three years ago, to 20-25 percent at present. When the reinsurance rates go up, absorbing it in the balance sheet would mean that there would be an impact on the profits, a factor that leads to insurers passing on the cost in form of premium hike.

LIC customers, however, may get partial relief. At an event on February 7, LIC chairman MR Kumar said there has been a perception that premiums for LIC policies are higher than that of private insurers.

He added that the insurer is looking to change that image and added that they have reduced premium rates. As far as term policies are concerned, while Kumar did not specify the quantum of the hike, he added that LIC policyholders will not face a ‘major impact’.

Term plans are considered the core of the life insurance industry. These products pay a lumpsum amount on the death of the policyholder during the policy term, which is then used by the dependents to meet their financial needs.

With intense competition among the private life insurers, there has been an almost 30 percent drop in the annual premiums in protection plans over the last two to three years.

For as low as Rs 500 a month, an individual (30-year-old non-smoker) can buy a Rs 1 crore term plan online. Here, online plans are considered cheaper as no commissions are paid for such plans.