6 Factors That Affects Premium of a Term Insurance Plan

2022-12-08

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The uncertainty of life got me thinking about the importance of constants in our lives.” So said Michele Scott, author and playwriter. Our lives are about securing life through possible uncertainties, and a term life insurance plan is one tool. You must have experienced the uncertainty of life through the experiences of others. Did these experiences induce you to secure your life or create a buffer of protection to deal with the possible uncertainties?

If it did, you must have considered term life insurance as one of the ways to protect your family’s financial life. This is especially important if you are the sole or main earning member of the family. Recently, the premium growth of term life insurance made headlines, and if you are worried about the following:

Should you worry about premium growth?
How does it affect your existing term life cover?

Key Takeaways

Term insurance premiums rise with age, health risks, and external crises.
Both individual and systematic factors affect your premium amount.
Reinsurer rate changes directly impact your premium rates.
Despite premium growth, term insurance remains an essential financial safety net.
Buying online often reduces premium costs.

Does the Premium of a Term Insurance Plan Increase Every Year?

To understand the reasons for this, you need to understand how the premium rates are determined. Generally, an insurer works on a concept of shared risk.

For example, imagine a village with 100 people with the same income and same age group etc. The village is close to a river. Every year, the river gets flooded and two houses are washed away. It is unpredictable which 2 of the 100 gets affected.

To deal with this, the village sets up a plan. Every year, every house gives a particular amount which is equal to the amount of how much it takes to build 2 houses.

In the first year, Person A and Person B get affected, and they are reimbursed with the corpus that the whole village has contributed.

In the second year, Person C and Person D get the benefit and so on. Now imagine that one particular year, there is a massive amount of rain and 4 houses are affected.

Then the amount given to the 4 houses is half of the amount given to the first 2 people. To ensure all 4 houses are covered in the same amount as was done earlier, every house has to pay more.

Term Insurance premiums rates are similarly determined by statistics and mathematical calculations based on their calculation of risk. The higher the risk of the adverse event, the higher the premium has to be.

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Factors Affecting Term Insurance Premiums

There are two types of factors which affect the premiums:

Individual Factors: These factors lead to variation in individual premiums. You have some control over these factors individually.
Systematic Factors: These factors can affect the premiums in general for the whole population or a specific group. Individually, you cannot influence these factors.

Individual Factors (Under your control)

Lifestyle Habits: Smoking and drinking increase risk, so premiums rise.
Obesity: Can lead to diseases like high blood pressure and heart problems, raising premiums.
Profession: Risky jobs like mining and oil & gas have higher premiums.
Duration & Value of Policy: Longer duration and higher sum assured mean higher premiums.
Age: Premiums increase as age increases. Younger people are less risky to insure.
Family History: Hereditary diseases like cancer or heart issues can raise premiums.

Systematic Factors (Beyond your control)

These affect everyone, such as:

Unexpected External Circumstances: Events like earthquakes, pandemics (COVID-19) increase risk for insurers, so premiums go up overall.
Reinsurers’ Pricing: Insurance companies depend on reinsurers, who adjust their prices based on general risk. Recent changes in premiums are due to reinsurers revising their rates.

How to Manage Rising Term Insurance Premiums?

The increase in premiums may appear to be dreadful and wrong, but there are clever ways of going about them without having to risk the financial benefits of your family:

Buy Early: The earlier you purchase term insurance, the cheaper the premium you will have to pay. Purchasing a low rate at an early age during the whole policy period. An individual of 25 years who purchases a cover of 1 crore pays much less than those who begin at 35.
Simply Wise Coverage Pick Sufficient Never Too Much: Deny your real financial needs as a family, depending on the liabilities, children's education and living expenses. And do not over-insure yourself and pay premiums that are too high on a cover you may not need.
Choose Online Plans: Online term plans tend to be cheaper since the costs of reimbursement of the agent and operational expenses are avoided. As an example, the iSelect Smart360 Term Plan by Canara HSBC Life Insurance has good online premium rates in addition to flexibility.
Have a Healthy Lifestyle: Premiums are directly dependent on the lifestyle you have. Individuals with a healthy weight and non-smokers are charged lower premiums. The cost will be highly reduced on quitting smoking or cutting down alcohol before being ready to buy a plan.
Take a Look at Policy Reviews: Review your insurance needs as your life stages change, such as marriage, having children, or taking a loan. Timely adjustments to your coverage will help you avoid overpaying or being underinsured.
Check Plans and Features: While cost is important, also compare riders, claim settlement ratios, and insurer reliability before choosing a term plan. Sometimes, slightly higher premiums provide better overall benefits and hassle-free claims for your family.

Impact of Reinsurers on Term Insurance Premiums

Many people do not realise that reinsurers play a major role in deciding term insurance premiums. Reinsurers are companies that provide insurance to insurance companies. When the risk for reinsurers increases due to factors like pandemics, economic downturns, or rising claim payouts, they raise their rates for insurers.

As a result, insurance companies pass on these increased costs to customers in the form of higher premiums. For example, after the COVID-19 pandemic, reinsurers revised their mortality assumptions globally, leading to a rise in term insurance premiums across all insurers.

This means that even if your personal health or habits haven’t changed, external market forces influence what you pay. Understanding the role of reinsurers helps you realise that premium changes are not always due to your insurer alone but are a part of the broader global insurance ecosystem.

Final Thoughts

Term life insurance acts as a financial safety net in today’s uncertain world, securing your family’s future. The premiums can increase based on factors such as age, health conditions and even market risks, but this is not supposed to be an excuse to come up with measures that will allow your family to continue living a stable life even after you are gone.

Some of these plans, such as the iSelect Smart360 Term Plan by Canara HSBC Life Insurance, offer flexibility in the number of payments, affordability and sure coverage as per your requirements. Selecting the right term insurance today can make your loved ones enjoy peace of mind forever.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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