Mumbai, Sept. 23: All those looking to buy term assurance policies, there’s good news: insurers are planning to cut the premium they charge in the next two to three months.

Term assurance policies account for just a sliver of the overall business — just 0.5 per cent in the case of Life Insurance Corporation (LIC), the big daddy of the industry.

While LIC intends to cut the premia on its term assurance policies by December, it won’t say by how much. Kotak Life Insurance — a small private player — says it will trim the premium on these policies by as much as 20 per cent. Others are expected to follow suit.

The rates are being trimmed only for the term assurance policies and not the endowment or annuity plans. This is a result of the new actuarial tables that reflect the increase in average life expectancy in India.

“Since the mortality rates among Indians have gone down, we will have to decrease the premia for the term assurance plans. We have not yet decided on the final premium rates, but we are planning to reduce them from December or January,” G.N. Agarwal, executive director of LIC’s actuarial department, told The Telegraph.

“Since mortality has come down, by November, we are reducing the premia of our term assurance plans by 15 to 20 per cent. Term assurance plans are the largest selling policies in the US, but in India they are the lowest selling ones. We haven’t changed the premia for term assurance plans since inception. By reducing the premia for such plans, we hope to draw more customers in the coming years,” said Pankaj Desai, chief investment officer at Kotak Life Insurance.

Policy types

Life insurance policies can be broadly categorised into four types: term assurance plans, endowment plan, pension or annuity plan, and unit-linked insurance plans.

A term assurance policy covers the risk only during the selected term period. If the policyholder survives the term, the risk cover comes to an end. No surrender, loan or paid-up values are granted under term life policies because reserves are not accumulated. If the premium is not paid within the grace period, the policy lapses without acquiring any paid-up value.

Most of us understand life insurance policies as endowment plans. Under these plans, one gets the insurance amount plus bonus on maturity or death. The premium we pay for this cover has two elements: the first part is for the risk or insurance cover and the second is the savings element. Insurance companies invest the savings component and declare the return as bonus every year.

However, term policies are an exception to this rule. They do not have any saving element. Therefore, the premium is low.

Some insurers are waiting to see how the rate war develops. “Depending on our mortality experience, we might also decrease the premia for term assurance plans. We have not decided the final rates yet, but we might soon see changes in the term insurance premia,” said an official close to Bajaj Allianz Life Insurance.

However, not everyone is looking to cut the premia on their term assurance plans.

“Our term assurance plan is already available at the most competitive rates in the life insurance market. Our aggressive pricing has factored in the marginal reduction in mortality rates witnessed in the recent past and we do not intend to reduce the prices as of now,” a senior official at Reliance Life Insurance said.

Private life insurance major ICICI Prudential Life Insurance refused to comment.

Life expectancy rising

The average life expectancy of Indian men has increased to 63.87 years from 59.7 years in 1991; in the case of women, it has increased to 66.91 years from 60.9 years.

Since the average life expectancy among Indians have gone up and a majority of the working population has become more confident that they will survive longer, life insurers in India are finding it increasingly difficult to sell term assurance policies.

“We sell two types of term assurance plans — Amulya Jeevan and Anmol Jeevan. While the premium for the new policyholders will be reduced, we will increase the sum assured amount by an equivalent percentage for our existing policyholders. We hope to attract more customers towards our term assurance plans by doing this,” Agarwal said.

The mortality tables hold the key to pricing an insurance policy. Some other factors that are used by actuaries in pricing a policy are interest rate trends, insurers’ expenses and tax rates.

When the insurance market was thrown open to the private sector seven years ago, private insurers had no choice but to use LIC’s mortality tables to price their policies. They use LIC’s mortality table as a base and combine it with their own claims experience to price their products.

Therefore, even if the base is the same for all companies, the final pricing also depends on the insurer’s experience.

Term assurance plans constitute only about a per cent of the overall insured population in India. LIC has just 4.5 lakh policyholders covered by term assurance plans.

Insurance experts believe that the decrease in mortality has taken the sheen off the term assurance plans. Today, people prefer to invest more in unit-linked products, which account for about 75 per cent of the total premium collection in the life insurance business.