Why life insurance policy premiums are rising

There is another round of hikes in term insurance premiums that individuals will witness in the coming months. While the move will lead to a higher premium outgo, it is important for individuals to understand the importance of term policies and the math behind higher premiums:

Term policies and mortality rates

A term policy ensures payout to the nominees of the policyholder only when there is death during the term of the policy. This means that the probability of death of the policyholder is the most important factor that the insurance companies consider in pricing these policies. The chance of a person dying within a specific time is also called the mortality rate and this has a direct impact on the premium that is charged by the insurance companies. So, a worsening mortality rate where the chances of death rise will lead to a rise in the premium.

Covid-19 impact

One of the main factors that has affected the mortality rate is the Covid-19 pandemic and the fact that it has led to a rise in the death rate across the country. The overall rise in the mortality rate is one of the reasons why insurance companies increase the premium.

Reinsurance rates

Insurance companies usually get insured from a reinsurer in order to lower their risk. The reinsurance rates are being raised due to the overall impact on the mortality rate and this means that the insurance companies are finding it costlier to reinsure their portfolio. By charging a higher premium, insurance companies are passing on the higher reinsurance cost to the consumers.

Lock-in period

A person who buys term insurance has to understand that the insurer will lock in the premium for the entire duration of the term. The premium paid by the subscriber is equal and fixed for the entire term. It is not linked to the external conditions. So, if you are an existing policy holder, you will be immune to the changes that may come into effect after you’ve bought the policy.

Also, the fact that the premium is rising does not reduce the significance of life insurance as it remains an important part of an individual’s financial portfolio. One has to be careful and select a policy that covers the desired needs and at the same time is also affordable for them. This is why there has to be some attention paid to the choice of the policy and the way in which this is bought.

(The writer is founder, Moneyeduschool. Views expressed are personal)