Five facts about Age and Life Insurance Premiums and one Universal Need

Everyone knows that life insurance premiums depend on age. The older you are the higher your premium. This is because the moment you are born you start to die. So how do companies charge the premium and still make money? Lots of people die and lots of them have policies: so how do insurance companies make money (for the record: only smart companies make money)? And why do different companies have different rates for the same age?  Let us reveal some secrets.

Good luck of many pays for the bad luck of few.

Insurance companies can predict how many will die, not who will die. In theory only God can predict who will die. But insurance companies can predict with remarkable accuracy that given a group of individuals with similar profiles, how many will die. No magic here: they have accumulated statistics from the 1700s. Yes, they have been collecting records and data for 400 years, so you can expect them to be fairly accurate. So now it is simple: collect premium from lots of people, set aside some money to pay claims for the chaps who will kick the bucket, spend some on salaries and stuff and retain the rest as profit. Seriously, it is as mundane as that.

Women live longer than Men.

Women are better than men; up to a point that is. Women are better risks than men and insurance is probably the only business where women are treated as better customers and charged less. Women live longer than men provided they have the same opportunities in nutrition and health and education, unless their lives are tragically ended due to cultural shocks like burning them for dowry. Thus for the same age women will pay a lower premium than men.

Accident and Mortality Rates Shoots up in the twenties

Age makes men foolish and insurance companies know that. Women would argue that age has nothing to do with being foolish as far as men are concerned. Neither are we are not talking about the second childhood where some men behave as if they have to make up for the lost years. As far as theory goes, and common sense supports this theory, a man who is older will die earlier.  But Insurance companies are keen observers of human behaviour: their business depends on it. Heard of the accident hump? In an otherwise predictable mortality curve, the accident hump happens between the ages of 18 and 28 when boys discover motorcycles (and girls). Premium rates will reflect the accident hump pretty actively because death rates in these ages due to accident are fairly higher than that of other ages.

Young Subsidize the Old

The younger you subsidises the older you. Insurance companies are pioneers of the welfare system. Most of us are aware that we are charged the same premium throughout our policy duration. This flies in the face of logic that the older we are, the higher the premium we should be paying. This happens because the insurance company levels the premium to prevent your exiting the system in future. At the age of 50 you would be paying 5 times of what you would be paying at the age of 18. The chances of your exit are higher if your premium keeps on rising. The insurance company charges an appropriate discounting factor and levels your premium: till a certain age you are actually paying more than what you should be paying based on your current age and thereafter you will be paying a little less than what you should be paying based on your current age.

Cheaper premiums do not mean better products.

Insurance companies have expenses, so in theory every company’s premiums must reflect money set aside for claims, adding of expenses and settling for a reasonable profit. Premiums vary on the fact that some companies have fatter expenses, or may want a higher profit margin. Some companies may keep aside more money for claims, because they have a worse experience than other companies and are more prudent. None of this is very transparent to an ordinary customer and as a customer we can do our due diligence by logging on to a good Insurance comparison site and doing our research. Check for how soon they pay claims and how many claims are paid as a percentage of total claims. You may also check for customer service levels.

Immutable Need

Nobody can predict death. If you do not have term insurance, buy a term plan now. If you have already bought one, check if the amount of cover is 100 times your current monthly income. If there is a shortfall fill that up. Before your next birthday, that is.

Should you take a Loan against an Insurance Policy

Is it a good idea to raise a loan against your insurance policy? The answer can be a yes or a no, depending on circumstances.

Not all Policies Offer loans

First things first: Not all policies can be used to raise loan. General insurance policies have no provision for loan because by nature these are indemnity policies. This means that these kinds of policies have no current value: only on claim will they acquire a value that is equal to the claim paid out. Life insurance policies can be used to raise a loan. The amount of loan is determined by the current surrender value of the policy. Surrender value is the value one will get from the insurance company if he decides to voluntarily terminate the policy. Because surrender values are the function of the number of premiums paid, generally older policies will have accumulated greater surrender value as compared to newer policies. By extension, this means that the proportion of loan on older policies will be higher than on newer policies. There are other factors like the duration of the policy contract that will impact the amount of surrender value, but for general purposes it may be assumed that under similar policies, the older the policy, the greater the surrender value. Term insurance policies that pay out only on death are policies that have no surrender value. Therefore no loans are possible on term policies.

However, not all life insurance policies can be used for loan. New policies may not have accumulated enough surrender value to generate a loan. Some policies may have generated a surrender value, but the quantum may not be enough to cross company guidelines on minimum value that can be paid out. Some policies by nature of contract may not grant loan. Typical amongst these are policies that offer a survival benefit in terms of periodic payouts.

Insurer may be Less Insistent on regular EMI

Loans can be raised from the insurance company itself or from an external lending agency like a bank. In both cases the quantum of loan will be decided by the current surrender value and in both cases the policy will have to be assigned to the lender. By executing an assignment, one transfers the ownership to the lender, who then has first rights over the proceeds of the policy. In both cases, interest will have to be paid to service the loan. By and large insurers charge a lower rate than commercial lenders; however this may not be true in all cases. While the external commercial lender will insist on payment of interest, the insurer may not be particularly insistent. The reason for this is that since surrender value is consistently rising on payment of every premium, the insurer is confident that his loan is recoverable along with outstanding interest. If premium payment stops, the insurer will calculate the outstanding loan and interest and if it exceeds the surrender value, he will forfeit policy proceeds.

With Insurance loans you take upon yourself a higher quantum of Risk

By now it should be obvious that loans may be availed only if the need is critical enough. Any loan reduces the overall risk cover, because the insurer at claim payout will reduce the claim by the amount of loan. The choice of the lender will be decided by interest rates and other factors, however it is obvious that loans from the insurer are more convenient to process and may have a faster turnaround time. Ensure that interest is regularly paid to prevent accumulation of interest amounts and prevent a possible forfeiture of policy proceeds.

Are you really helping the Little Guy, Mr Modi?

Last few weeks we have seen a cacophony of voices dubbing the Modi government pro corporate and Anti poor. Much of the commentary on this subject is political.  Frankly I find much of it hot air. However there is one new item that caught my Eye. It was Pradhan Mantri Jeevan Jyoti Bima Yojana. It is fact that most people in the country don’t have life Insurance and poor suffer the most. Families are often without any protection and have to face financial ruin in addition to the loss of an earning member. So when I first heard about the initiative I thought what a brilliant idea.

For those of you who don’t know, Pradhan Mantri Jeevan Jyoti Bima Yojana provides for life cover of Rs. 2 Lakhs for anyone between the ages of 18-50. The premium is Rs 330 per annum. In order to be eligible for this you need to have a bank account and your bank must have tied up with a Life Insurer willing to underwrite this cover. Overall it I think the concept is a good one and hasn't come a day late. One wonders why previous governments haven’t thought of it. 

I can also see what “Market driven” analyst must be thinking. Another populist scheme to bleed the tax payer. Is it really? Let’s see what the typical market rate for Life Insurance is.  The table below has the life Insurance premiums for a male aged 30 for 25 year.

Product	Sum Insured	Premium	Rate per Rs ‘000
Reliance Online Term	1,00,00,000	Rs. 7094	0.71
Aviva i-Life	1,00,00,000	Rs. 7292	0.73
ETlife My Life +	1,00,00,000	Rs. 6692	0.67
Max Life Online Term	1,00,00,000	Rs. 7865	0.786
Tata AIA I Raksha	1,00,00,000	Rs. 8314	0.786

If you work out the Math for Pradhan Mantri Jeevan Jyoti Bima Yojana, it comes to a rate per thousand of Rs 1.65 per thousand sum Insured. That is more than double of what a person buying on the open market pays.   The reinsurance rates for life insurance in India is around Rs. 0.67 per thousand. If you add service tax it comes to about 0.76 per thousand. The rate government is charging the poor is a 220 % premium on that.  That is plain language is predatory pricing.

Even if the government were to reinsure the entire amount they will pay no more than 0.76 per thousand rupees of Sum insured.   In all fairness, I should point out that there are no insurer who offer a cover of two lakhs and there are some transactional cost which are fixed and not dependent on sum insured. Even accounting for those a rate of 1.65 per thousand.

If you go by the thumb rule of required cover being 10 times the income. At 2L that is just adequate cover for someone earning less than Rs 2000 pm. That is well below the poverty line figure (going by the infamous Planning commission figures) for a family of 4. Rs. 330 is not a massive amount and for that price the cover would be easily doubled to Rs 4L. Additionally I think the Govt should allow people to top up on this cover. Most people would be happy to pay the market rate. All the government needs to do is to extend the access to this very important financial product to all at market rate. Hope Mr. Modi is listening. 

Life insurance Corporation (LIC) New Children’s Money Back (Plan No. 832): Should you Buy This?

A few days back a new plan was launched by LIC of India. This plan is called the New Children’s Money Back (Plan No. 832, UIN 512N296V01)

Plan Details:

Briefly the plan details are as follows:

·         This plan is only meant for children, provided the grand/parent proposes the insurance. The child can be between the ages of 0 to 12.

·         The minimum Sum Assured is 1 lakh and there is no maximum limit.

·         The duration of the policy is calculated as 25 minus Age at Entry.

·         At the policyholder age of 18, 20 and 22, 20% of the Sum Assured is returned as a “money-back” instalment. The balance is returned on Maturity (at policyholder age 25).

·         Simple reversionary bonus and a potential Final Additional Bonus is payable along with the Maturity Sum Assured.

Issues to consider before you buy this policy:

·         There is no risk cover till the child completes 7 years of age. This means that the policy functions as a deposit scheme till that time. Of course if the child is 8 and above risk is covered.

·         Reversionary bonus rates are unknown at this point of time. Rates of bonus have been inconsistent and rates of return are not very high. The Final Additional Bonus is an unknown quantity at this point of time.

·         The annual premium for a Sum Assured of 1 lakh is Rs 5586 at age 5. Premium will be payable for 20 years. The total amount paid will be equal to Rs. 111,720. (5586 X 20 = 111720). If Service tax is added, the total amount paid as premium will be higher.

Our View:

·         On an overall basis, we are not in favour of insuring children unless they are earning an income. It is much better to insure the parent who is paying the premium. It is a poor parent who hopes to profit by the death of his child.

·         If on the other hand the objective is to instill a savings habit in the child, a look at the maturity benefits will reveal why we do not advocate taking insurance for investment returns. In the benefit illustration provided by LIC the final payable amount (All Survival Benefits + Maturity Amount + Bonuses) will range from 104,000 to 158,500. We doubt whether the upper end of the range will be achieved. Remember, you would have already paid a total premium of Rs. 111,720. Would you be better off with other avenues of investments?

We at policylitmus believe that insurance is a critical need. However it is equally important to buy the right policy and not be misled by incorrect advice. Find out the best policy for you, from over 1000+ products without giving away your contact details.