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August 2, 2014

Life Insurance Premiums are declining! Will this trend continue?



This post is linked to my earlier post on life insurance “Should you buy life insurance at an early age to benefit from lower premiums?” This post analyses the trends in the cost of buying life insurance in India over last decade. This post is also an attempt to understand whether buying life insurance is going to get costlier in future.

To understand the changing cost of life insurance over time, we need to compare the premiums to be paid by persons of same age for buying similar insurance plans in different years. For example, if in 2002, a 30 years old male needed to pay Rs. 3,700 per annum to buy a term life insurance of Rs. 10 lakh for a term of 20 years, it needs to be compared with the premium another person of 30 years, in 2014, needs to pay for similar Rs. 10 lakh insurance policy for a term of 20 years. If premium in 2014 were more than Rs. 3,700 then it would mean that life insurance is getting costlier with time. However, if premium in 2014 were lower than Rs. 3,700 then it would mean that life insurance is getting cheaper with time.

To find out the change in premiums of life insurance over last decade, I have compared the cost of term life insurance plans of various insurers in 2002 and 2014. Data of premiums of term life insurance plans for 2002 has been taken from an article in February 2002 issue of the magazine Outlook Money. Data of premiums for term life insurance for 2014 has been taken from premium calculators on websites of respective insurance companies.



For 2002, the details of premiums of term life insurance from different insurance companies for a 30-year-old male are given in the table below:

Name of Insurance Company
Name of Term Plan
Insurance Cover (Rs. Lakh)(A)
Policy Term (Years)
Annual Premium (Rs.) (B)
Amount of Premium Per Lakh of Insurance Cover = (B/A)
Kotak Life Insurance
Term Life Assurance Plan
10
20
3,700
370
Birla Sun Life
Flexi Term Plus
10
20
3,710
371
Tata AIG
Assure Lifeline Plan
10
20
4,550
455


The table shows that in 2002, for a Rs. 10 lakh term life insurance policy, a 30 year old male needed to pay an annual premium of about Rs. 3,700 - 4,500 which is about Rs. 370 - 450 per lakh of insurance cover.

While comparing the term life insurance premiums of 2002 with premiums of 2014, many factors limited a direct comparison:

  • Birla Sun Life and Tata Life Insurance have stopped selling pure term life insurance plans with a life insurance cover of less than Rs. 50 lakh. 
  • Tata AIG Life Insurance Company got changed to Tata AIA Life Insurance Company due to exit of American AIG group and entry of Hong Kong based AIA group in the company. 
  • Kotak Life Insurance has put a condition of minimum annual premium for its term life insurance plans.

Therefore, for comparable 2014 premiums data, I had to find out such term life insurance plans, which were as similar to 2002 term life insurance plans, as possible. 


Currently, in 2014, Kotak Life Insurance and Future Generali Life Insurance offer such pure term life insurance plans but they have put minimum premium restrictions in their plans:

  • Kotak Life Insurance does not sell a term life insurance for premium less than Rs. 1,800 per annum and 
  •  Future Generali Life Insurance does not sell a term life insurance for premium below Rs. 2,500 per annum

Therefore, I calculated term life insurance premiums for a 30 years old non-smoker male for a 20 years term life insurance with such insurance cover amounts, which met the minimum premium requirements and were the closest to the 2002 term life insurance plans:

  • For Kotak Life Insurance, cover amount of Rs. 11 lakh satisfied the requirement of minimum premium.
  • For Future Generali Life Insurance, cover amount of Rs. 13 lakh satisfied the requirement of minimum premium.
 
For 2014, the details of the premiums of term life insurance from different insurance companies for a 30-year-old male are given in the table below:

Name of Insurance Company
Name Of Term Plan
Insurance Cover (Rs. Lakh)(A)
Policy Term (Years)
Annual Premium (Rs.) (B)
Amount of Premium Per Lakh of Insurance Cover = B/A
Kotak Life Insurance
Kotak e-Term Plan
11
20
198
Future Generali Life Insurance
Care Plus - Classic
13
20
200

The table shows that in 2014, for a term life insurance policy of about Rs. 10 lakh, a 30 year old male needed to pay an annual premium of about Rs. 2,100 - 2,600 which is about Rs. 200 per lakh of insurance cover. 

After comparing the two tables, we can see that over last decade (from 2002 to 2014) the cost of comparable term life insurance plans has reduced by almost 40-50%:

  • Annual premium for a Rs. 10 lakh term life insurance policy has decreased from about Rs. 3,500 – 4,500 per annum in 2002 to Rs. 2,000 - Rs. 2,500 per annum in 2014. 
  •  Premium costs per lakh of insurance cover have decreased from Rs. 370 – 450 per annum in 2002 to about Rs. 200 per annum in 2014.

Reasons for decrease in premiums of life insurance:

To understand the reasons for decrease in life insurance premiums, we need to understand the factors determining the life insurance premium. As per Dept. of Financial Services, New York State, there are primarily three factors, which affect the life insurance premium:
  • Mortality rates: it determines the average life expectancy for different age groups. Lower mortality rates and higher life expectancy mean that there is a lesser probability of insurer needing to pay the insurance amount. As per World Bank, life expectancy (in years) in India has been increasing over last decade. The graph below, taken from World Bank website, shows the increasing average life expectancy (in years) for India over last decade:

Increasing life expectancy and lower probability of insurance claims has played a significant role in the decrease in life insurance premiums in India over last decade.
  • Expenses for operating a company: it includes salaries, agent’s commission and legal fees etc. Total expenses of the company are divided among all the policies sold by the company and are included in premium amounts. This is called ‘Expense Loading’. In India, opening up of the insurance sector for private players, information technology revolution, improved internet penetration has reduced the expenses, which companies needed to incur as part of sourcing, issuing, managing and servicing insurance policies. The decrease in operating expenses per policy has also contributed to decrease in life insurance premiums.
  • Interest rates: it represents the returns life insurance companies make on the pool of premium payments they receive from people who buy insurance. Higher returns on investments mean that companies can meet part of their expenses from the return generated on these investments. Companies then decrease the expense loading leading to decrease in premiums. Interest rates & returns on investments move in a cyclical pattern of uptrend and downtrends and therefore can be partly responsible for decrease in life insurance premiums.
Another major factor, which has not been covered by Dept. of Financial Services, New York State, but played a major role, is competition in the market. Opening up of the insurance sector to private players has led to fierce competition among insurers. Insurers have reduced the profit margins on insurance policies to get more market share. This has in turn benefited the customer by a decrease in premiums.

As per insurance industry expert, Amit Rai, there are some other factors which have led to decrease in premiums of online term life insurance plans. Firstly, purchase of term life insurance via website saves significant sourcing and selling expenses to insurance companies like agent's commissions.Secondly, a customer who purchases an insurance policy online, is assumed to be a well aware and responsible customer who would take less risks in life and therefore probability of claim of insurance amount would be lower. Therefore, insurers keep premiums of online term life insurance policies significantly lower than other similar policies which are available offline through agents or insurer's office. Therefore, it is advised that one should buy online life insurance plans.

Future trends in life insurance premiums in India:

In India, the life insurance sector is at the verge of a major shakeup. Many policies, which would have a major impact on the sector, are under consideration:
  • Increase in foreign direct investment (FDI) limit to 49%: This would result in existing private insurers getting more money from their rich foreign partners and new global insurers entering in India. 
    • It would lead to increased competition and in turn lower premiums.
    • Insurance penetration in population would increase, leading to higher investment corpus with insurers, which might lead to increased investment income. Insurers would decrease premiums on increased investment income.
    • More money will be invested to create better infrastructure backbone for the industry which would lead to lower per policy expenses and result in decrease in premiums.
Other factors like improving health care resulting in increased life expectancy, ongoing initiatives by IRDA and govt. are also likely to continue to have their impact on declining premiums.

Therefore, I believe that the declining trend of life insurance premiums is expected to continue or at least stabilize at current levels.