Costlier term cover: Opt for high claim settlement with low premium

Narrow down prospective insurers' list to well-known players with strong claim settlement ratios, then select one offering lowest price

Major private life insurers like HDFC Life, ICICI Prudential, Bajaj Allianz, and Max Life Insurance have increased their term insurance premiums by 4 to 7 per cent. Here are a few tips on how prospective buyers should cope with these hikes.

Causes of premium rate hikes

Claims experience is usually the biggest factor behind premium hikes. “Based on it, insurers have to keep revising the premiums periodically,” says Mahavir Chopra, founder, Beshak.org.

Reinsurers have been hiking their reinsurance premiums over the past few years. “It is one of the major reasons for the rise in premiums,” says Naval Goel, chief executive officer, PolicyX.

Term premiums have been flat for a couple of years. “Premiums have to be revised periodically to reflect inflation and rising expenses,” says Kapil Mehta, co-founder, SecureNow.

Interest rates are another factor. “The interest rate cycle is set to change with rates likely to come down soon. Even over the long term, there is likely to be a secular decline in interest rates. These developments will affect long-term interest rates, which are most relevant to insurers, and need to be factored into pricing,” says Mehta.

Lock-in premiums

Many insurers may not have implemented the premium rate hikes yet. “If you apply for a term plan right away, you will be able to take advantage of the lower rates that are still available,” says Chopra.

The latest increase should not deter buyers from purchasing a term cover. “Even after the increase, term premiums in India are competitive compared to global standards,” says Chopra.

For a Rs 1 crore term cover that costs Rs 20,000, a 4-7 per cent increase would mean an increase in premium by Rs 800-1,400. “Even if the hikes have already been implemented, customers should still buy a policy and lock in the premium at a young age,” says Chopra. Term premiums are lower at a younger age and higher at an older age. Once purchased, the premium remains constant throughout the tenure.

Compare premiums

Narrow down the list of prospective insurers. “Select 8 or 10 well-known insurers with strong claim settlement ratios. From this list pick the insurer offering the lowest price since term insurance is a commodity product,” says Mehta.

Individuals who smoke or consume alcohol are charged higher premiums. “Adopting a healthier lifestyle can help them get better premium rates,” says Goel.

Don’t crimp on sum assured

Select the sum assured carefully. “Instead of randomly purchasing a cover of Rs 1 or Rs 2 crore, evaluate the protection gap and then decide the sum assured,” says Chopra.

Term covers come with several riders. “Avoid the non-essential ones as they will unnecessarily push up the premium,” says Goel.

Many customers feel the premiums paid would be wasted if they survive the policy tenure. To satisfy them, insurers offer return-of-premium term plans. “Customers should avoid these plans. They will end up paying a 1.5-2x higher premium. Moreover, the amount returned at the end of the tenure will not be significant in inflation-adjusted terms. Instead, go for a pure term plan and focus on buying an adequate sum assured that ensures your family’s financial safety,” says Chopra.

Having purchased a plan, reevaluate it every five years. “Term premium rates are cyclical. There are periods when rates fall. If that happens, shift to a lower-cost plan,” says Mehta. Goel warns against hiding crucial health-related information from the insurer.