Cover Point: Why are LIC term insurance premiums costlier than private insurers?

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This week's question is from K Kumar, Hyderabad

 

LIC’s term plans are indeed far more expensive than private insurers. For a 30-year-old male, for a sum assured of ₹1 crore, LIC will ask for an annual premium of ₹19,000, while the same cover from a private life insurer, say, Aegon Life, Bharti Axa Life or Edelweiss Tokio Life may cost only ₹8,000-10,000 a year. LIC prices its product at a premium to others because of it being the only life insurer with government backing and sovereign guarantee.

The Life Insurance Corporation of India (LIC) was set up in September 1956 after nationalisation of 156 life insurance companies in India with Parliament passing the Life Insurance Corporation Act in June that year. This Act gave the Corporation a guarantee from the Centre for the sum assured under all its policies and any bonus it declares.

LIC also boasts a high claim settlement record — 98.3 per cent. From the private space, the highest record is of Max Life (97.8 per cent) and HDFC Life (97.6 per cent). But given that in 2015 itself, the insurance market regulator IRDAI barred insurance companies from rejecting any claim that comes after three years of the commencement of the policy through the Insurance Laws (Amendment) Act, it doesn’t make a difference whether you hold a policy with LIC or with, say, MAX Life or HDFC Life.

One other way of looking at the high cost premium of LIC is its expense structure. For life insurance companies, it is the mortality charges and the administration cost that make for a chunk of their expenses. Mortality charges (the expense charged by the insurance company to provide life insurance cover) are based on past data of the number of deaths in a population. Though this varies from insurer to insurer based on the period and experience of the individual insurance company, the difference may not be large. So, that leaves us with only administration cost. It is possible that LIC’s administration costs are high because its sales channel is dominated by agents, and the commissions paid to them is charged on the policyholder as higher premium. But even in its online term policy where the cost is low, LIC’s plan is pricier to those of peers. This indicates that the company is actually not interested in the ‘term’ market.

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