How to Handle Term Insurance Premium Increases

Understanding Term Insurance Premium Increases

There can be numerous reasons for the change in term insurance premiums. Insurers constantly review data such as mortality rates and market trends based on which net premiums can go up. If the mortality rates have increased, it indicates higher death and health-related risks. For this, insurers charge a higher premium to cover up the risk.

If the operational expenses of insurers have gone up, they typically shift the burden on the customers by charging a higher premium.

IRDAI’s guidelines also play a critical role here. The regulator’s guidelines concerning the financial stability of the insurance companies can be in the form of adjustments to capital requirements, solvency margins, or underwriting standards that insurers must follow. Insurance companies charge higher premiums as the rules become more stringent (related to higher reserve requirements).

Eventually, one or many of these factors change the market dynamics based on which insurance companies are forced to increase premiums. One of India's biggest increases in term insurance premiums (recently) was in 2022, when the companies increased annual premiums between 20-40%, depending on the coverage, add-ons, and riders chosen.

Other Factors Driving Term Insurance Premium Increases

Besides the given factors, here are a few other policyholder-specific factors that can help in increasing term insurance premiums:

1. Age of the Policyholder: As an individual grows old, the probability of developing health issues increases. Hence, an insurer needs to manage a greater degree of risk for which a higher premium is charged.
2. Health Condition and Lifestyle Choices: Critical illnesses such as diabetes, hypertension, and cardiac issues are constantly increasing in India. Further, lifestyle choices such as tobacco and alcohol consumption can further result in increased vulnerability, higher risk, and hence increased insurance premiums.
3. Higher Claim Ratios: Due to external factors like COVID-19, the claim ratios can go up and accordingly, insurance premiums are revised. In addition, market trends, including inflation and changes in reinsurance rates, also contribute to premium increases.

Impact of Increased Premium on Policyholders

Term insurance is largely popular because of its affordability. If the premiums increase constantly, it can make it expensive and less attractive to people with lower disposable incomes. Here is how policyholders are affected by increased premiums:

1. Premium hikes can disrupt tight budgets, especially for families managing on limited incomes. This can lead to either withdrawing from a term insurance policy or reallocating funds for other financial goals.
2. Policyholders can look to reduce overall coverage, leaving their dependents without financial protection. There can also be fewer policy reviews as affordability becomes a challenge.
3. Long-term financial goals, such as children’s education, buying a home, or retirement planning, are affected as one of the critical financial planning tools (term insurance) suddenly becomes expensive.

Strategies to Mitigate Premium Increases

Despite the premium increase, we will advise you to continue if the term insurance policy is affordable (as per your income and expenses). Term insurance is an excellent tool for attaining long-term financial goals. Here are a few strategies to mitigate a premium increase:

1. You can reassess your coverage needs. In case you have passed an important milestone or your liabilities have reduced since you opted for the plan, you can continue by reducing total coverage. The revised premium shall be lower and affordable.

2. You must opt for riders wisely and cancel add-ons that do not add value to your policy.

3. Always try to maintain a healthy lifestyle to receive incentives from your insurer.

4. You can compare and switch insurance companies if necessary.

Besides these points, we always suggest to consult an expert or financial advisor. These experts can recommend policy adjustments or alternative options to manage premium hikes effectively. Rebalancing your insurance portfolio ensures you maintain adequate coverage without exceeding your financial limits.

Summing up

Term insurance is a simple and cost-effective tool for securing your family’s financial future. However, the premium of your term insurance policy depends on a variety of factors, both external and internal. If the increased premium is unaffordable, you might try different strategies, starting with reassessing your coverage needs to avoid overpayment, comparing policies to secure the best rates, leveraging essential riders for targeted benefits, and maintaining a healthy lifestyle to reduce risk.

Even though constant increases in term insurance premiums can be challenging, they can be managed with thoughtful planning.

FAQs

Why do term insurance premiums increase over time?

Term insurance premiums increase due to factors like rising mortality rates, operational costs, regulatory changes, and policyholder-specific risks such as age and health conditions.

How can I avoid paying higher premiums for term insurance?

You can avoid higher premiums by purchasing a policy early, maintaining a healthy lifestyle, and reassessing your coverage needs periodically.

Can I negotiate term insurance premiums with my insurer?

While premiums are largely non-negotiable, you can reduce costs by adjusting coverage, dropping unnecessary riders, or switching to a more affordable insurer.

What should I do if I can’t afford the increased premium for my term insurance?

Consider reducing your coverage, reviewing alternative policies, or consulting a financial advisor to find a more affordable insurance solution.