Term insurance to become cheaper

Wait for some time, if you have decided to buy a term insurance. The Insurance Regulatory and Development Authority (IRDA) is looking at ways to promote term insurance as they feel the general attitude among the public to deem insurance as a savings opportunity should change.

In India, life insurance is generally seen as an investment option rather than a cover for life. As a result we have insurance products like endowment policies, money back policies, ULIP etc from various insurance companies. Previously, I had talked about how inefficient an endowment policy is, where one pays huge premiums for small sum-assured to get a return that’s way less compared to what he/she would get from other investments made for the same period.

The main reason for the inclination towards savings oriented insurance policies was the lack of other investment options till a few decades back and to a lesser extent, the lack of awareness people had on the alternatives. But now we have quite a few efficient investment opportunities such as mutual funds, realty, commodities, equities etc. that can give a person much higher returns. And hence the affinity towards endowment and money back policies, ULIPs etc. shall come to an end; which triggered the IRDA move.

IRDA has identified two ways to popularize term insurance, one by incentivizing the insurance company and two, by incentivizing the insurance agent (Agents usually push ULIPs and endowment plans as they provide higher commissions). IRDA would reduce the solvency margin for the insurance company so that the reserves need to be maintained by the insurance company would come down. Thus, the amount to be allocated by the insurance company for writing a term insurance would reduce by 60%, making it cheaper than before.