“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 term life insurance is one tool, which allows the same.
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?
Rest easy as we answer your queries and clear the doubts.
Why Premium Growth?
To understand the reasons for this, you need to understand how the premium rates are determined. Generally, any 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.
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.
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 for a Lower/Higher Premium
LIFESTYLE: SMOKING OR DRINKING: Smoking or drinking are seen as increasing the likelihood of ailments and hence are seen as having a higher risk.
OBESITY: Obesity has been known to affect health and cause health problems like osteoarthritis, high blood pressure, stroke and heart diseases, resulting in higher premiums.
PROFESSION: The premium for workers in hazardous industries such as mining, oil and gas is more than people in risk-free professions.
DURATION AND VALUE OF POLICY: The longer the duration of the life insurance policy, the larger the sum assured, the higher the premium. This is because the longer-term ad larger value transfers more risk and responsibility to the insurer.
Systematic Factors Affecting to General Premium Growth
AGE: The premium rates increase as age increases. This is because it is generally seen that the likelihood of a young person dying or contracting a life-threatening disease is much lower than that of an older person.
FAMILY HISTORY: Hereditary diseases like cancer and heart ailments make you more vulnerable and increases the likelihood of you contracting the same, making your premium higher.
UNEXPECTED EXTERNAL CIRCUMSTANCES: Unexpected crises like earthquakes and pandemics like SARS and COVID 19 affect the overall expected risk and an increase in the number of people being affected. This also increases the premiums for the years following such an event. In the example given earlier, the flood affecting 4 people instead of 2 made the insurance company charge more to each person paying insurance to balance out the requirements.
An insurance company will factor in individual factors. However, their premiums also depend on the premiums offered to life insurers by the re-insurers. Re-insurers will factor in the general growth points and their changes will have a blanket effect on the retail life insurance premiums.
This time the premiums of the term life insurance have changed due to the changes brought in by the reinsurers.
Even with the increased premiums, terms insurance plans like the iSelect Star Term Plan, offered by Canara HSBC Oriental Bank of Commerce Life Insurance, is a good option as it gives you immense flexibility in terms of premium payments as well as that of the assured sum. Also, purchasing the same online makes the premiums lower.
Therefore, even with the changes to the term life insurance premiums, it remains one of the best options for you.