Does Term Life Insurance Premium Change?

POSTED BY Ram ON April 18, 2012 1:03 pm COMMENTS (12)

Say that a 30 year old buys a term insurance (up to 75 years one from Aegon Religare or Aviva) and the premium is set at Rs. 18,000 (for example). Does this premium change each year until you reach 75 or do you have to pay the same 18,000 per year for life until the age of 75 (assuming you don’t die)?

If the premium does not change, then should we not, ideally, depreciate the premium amount we are paying by the inflation rate per year? So, in our example, we would reduce the value of 18,000 per year by 7% (let’s assume inflation is going to average at 7%) and so the total amount you would pay till the age of 75 years would actually be not 18,000 * 45, but (I did this in excel) around Rs. 2,47,327. Right?

Thanks,
Ram.

12 replies on this article “Does Term Life Insurance Premium Change?”

  1. Dear Ashal,

    I have received message from Kotak and ICICI Prudential, saying that due to increase in Service Tax Rate w.e.f 01/04/2012, my premium will also increase.
    Is it so? I did not see any such condition in Policy Document.

    Please help

    Thank You
    R Siva Prasad

    1. Ramesh says:

      Service tax is always separate from the actual premium. And it applies to all types of insurance policies.

    2. Dear Siva, when I said, prem. ‘ll remain same, I meant for basic prem. charged for your life cover. Service Tax is a Govt. levy & it ‘ll be charged on actual always. In future as & when if Govt. decides to reduce the same you ‘ll be informed by the insurer for the same.

      Thanks

      Ashal

  2. Ram says:

    Manish, Bharat, Ramesh, and Ashal…thank you all for your replies.

    My conclusion is that since it is a fixed premium all throughout the insurance term, one should definitely adjust the premium future values based on inflation as well.

    Thanks,
    Ram.

  3. bharat shah says:

    i am just pointing out that as such the a/m paid to the nominee would also depreciate( or even appreciate!) depending upon the relative inflation( or deflation!) at the time.

    1. Ram says:

      Bharat,

      You’re right. However, when we usually look at sum assured we ask the question – oh, but how much will 1 crore be worth 20 years from now?

      I’m not sure how many people view even the premium like that. Basically, we are discounting the sum assured value by saying inflation will eat it up. But we’re not seeing the same logic for the premium.

      At least, I was not looking at it like that until it struck me that we should be depreciating the premium amount also. Again, I’m still trying to find out if the premium amount changes or stays fixed. When an insurance company says – your premium will be (as in the Aviva case cited to Manish above) Rs. 7887 per year; does it mean Rs. 7887 per year for the entire term of the insurance or will that premium keep changing every year.

      If it doesn’t change, then we should ideally be discounting the premium for inflation also, no?

      Thanks,
      Ram.

      1. Dear Ram, The prem. amount of 7887 ‘ll remain same for the term of the policy.

        Thanks

        Ashal

  4. Ram

    The premium pricing is such that its fair .. I mean there can be increasing premium if you want .. but then the starting premium would be small and increase each year ..

    But they calculate it such a way that one premium for all the years can be paid.. so dont worry on this aspect . To give you idea in other way .. say you have to pay Rs 100 per year for next 10 yrs and it increases by 10% each year , but instead of that you ask me what is that amount X which you can pay each year as fixed .. And answer would be somewhere around Rs 130 .

    So its all about future value of all your payments ..

    1. Ram says:

      Manish,

      Taking the example of Aviva, I was seeing that the online term insurance plan for a 30 year old for 1 crore sum assured is approx. Rs. 7887 per year.

      Is this Rs. 7887 premium the increasing premium kind of quote or is it the fixed price quote that says till age 75 you will pay the same Rs. 7887 per year?

      Thanks,
      Ram.

      1. Ramesh says:

        Fixed 7887 per year till premium paying term.

        1. Ram says:

          Ramesh,

          Thanks!

          So then, if one was to live till the age of 75…the effective premium he/she will pay in this case will not be 7887 * 45 (considering term as 30 years age to 75 years age), but will actually be approx. Rs. 1,08,370…adjusting each future year’s premium against an inflation rate of 7% (assumed as 7% average).

          Is that right?

          Thanks,
          Ram.

          1. Ramesh says:

            If your assumptions and calculations are right, then yes.

            Effective premium is definitely less than 7887*45.

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