The concept may sound contradictory, but four insurers charge a higher premium of anywhere between 10% to 32% for a cover of Rs40 lakh sum assured than they would on a cover of Rs50 lakh SA. Insurers claim that mandatory medical check up for a higher sum assured reduces their risk and allows a lower premium. They also offer a discount for higher SA. Are there other reasons for the discount?
Pradip Kumar Paul, 43, with an annual income of Rs5 lakh purchased a Rs50 lakh cover from AEGON Religare Life Insurance (ARLI) online. The 25-year iTerm policy carried a premium of Rs10,449. After the medical test, ARLI told him the premium would Rs12,494 for a sum assured (SA) of Rs 40 lakh. This turns out to be 20% higher than premium for Rs50 lakh SA. Mr Paul was also offered the option of a Rs50 lakh SA at the same premium of Rs10,449, if he gave up his existing ICICI Pru Life policy of Rs10 lakh SA. This was communicated to him offline. It was clear that there was no loading based on medical tests, but a clear predicament for the customer. If he accepts Rs40 lakh SA, he pays Rs12,494 (20% additional premium); if he wants Rs50 lakh SA at Rs10,449, he has to give up ICICI Pru Rs10 lakh SA cover.
Please Read - AEGON Religare: Kum Insurance Dene Ki Bimari?
Moneylife decided to investigate this paradoxical situation. We found that ARLI was not alone in offering a lower premium on a higher sum assured of Rs 50 lakh as compared to what they would pay on a cover of Rs40 lakh. We learnt that Aviva i-Life, Bharti AXA eProtect and HDFC Life Click2Protect all charge anywhere between 10% to 32% higher premium on Rs40 lakh policy that they would on a cover of Rs50 lakh. Strangely, the premium for Rs30 lakh cover is close to that of Rs50 lakh SA in most of the cases. In effect, a customer who wants a cover for Rs30 lakh may as well get himself/herself a cover of Rs 50 lakh at almost the same price. And, if you want a cover of Rs50 lakh, readers must ensure that they are not persuaded to opt for a lower SA, because you would end up paying a higher premium and only the insurer will benefit.
Insurers tell us that this discrepancy in premiums is because they offer discounts on higher sum assured and that medical examinations are mandatory for a Rs50 lakh cover. According to Aviva Life, “Most insurance companies offer discounts on higher SA. There are two types of costs involved when pricing a policy – Fixed Cost and Variable Cost. Even if the SA increases, the fixed cost remains the same and as a percentage to the overall cost, it keeps reducing. Typically, insurance companies pass on this benefit to the customer as a rebate for high sum assured. For i-Life, we offer such a rebate for Rs50 lakh, Rs1 crore and Rs5 crore slabs”.
Regarding the impact of medical test, Aviva added, “Customers going for Rs40 lakh SA do not need medical test for many age groups. But at Rs50 lakh SA, a medical test is mandatory. Due to this, the mortality experience of those going for Rs50 lakh SA is lower than Rs40 lakh SA. Insurance is a need based product. It is difficult to identify the target segment for Rs40 lakh SA as the amount of life cover one may opt for would entirely depend on his needs and liabilities”.
Medical test and high SA discount may not be the only reason for 10%-32% higher premium for Rs40 lakh SA compared to Rs50 lakh SA. After all, some online term plans require a medical even for a cover of Rs15 lakh. Are there other reasons for the difference? Yes, insurance companies cap the level of insurance that you can buy depending on your annual income. That is why, Mr Paul, in our example above was asked to get rid of his existing cover, if he wanted a higher SA from AEGON Religare.
According to an insurance industry expert, this is due to the perception that a person earning more, has a higher standard of living and has access to better medical facilities and hence, likely to have lower mortality rates.
Another insurance industry expert attributes the premium paradox to reinsurance. He says, when the SA is lower, the insurance company bears the risk and would charge a higher premium. While a higher SA may be reinsured, but no insurance company would reveal details of their reinsurance arrangement.
In a response to our query, HDFC Life told us, “We offer a high sum assured discount, which is applicable from Rs50 lakh SA. The objective of these discounts to the premium rates is to ensure that a customer can go for higher life cover”.
AEGON Religare Life Insurance and Bharti AXA Life did not respond to our question on why the premium was higher on Rs40 lakh SA as compared to that on a cover of Rs50 lakh.
Based on your age, annual income, existing insurance policies, lifestyle habits, requested insurance cover and so on, the insurance company should be able to tell how much cover they can offer. The medical test should only reveal if there is any loading based on medical results. Unfortunately, some insurers may start negotiating the insurance cover only after the medical tests at which point the customer is already trapped. Either the customer has to accept what the insurance company dictates or cancel the policy within free-look period which means refund is after deduction of medical test and other charges.
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The World of Apparent Paradox is all about Cover like Apparels. RICH NEED LESS AND LESS. Poor any way cant afford.
1. Is the risk in high sum assurred policies so low that premium for 50 lakhs is lesser than permium for 40 lakhs or equal to premium for 30 lakhs? In that case why don't all customers opt for 50 lakhs?
2. Why is this rule not for LIC? See
http://www.licindia.in/amulya_jeevan-I_b...
Why only discount for single premium policy only above 1crore? And that discout is already specified.
3. Why is that only online policies are having this rule? Doesn't this look like price was as we have in telecom? One reduces/increases the price others follow?
4. In the above mentioned example instead of medical health, income has been cited as the reason. Is 10* the golden rule for insurace? LIC allows upto 22*.
My advice to anyone going in for term insurance is that PLEASE insist that medicals are done so that there is no problem in claim settlement later on because that can be the ONLY factor which will decide whether your nominee will be paid the claim or not!