Why does the premium increase every year?


Why does the premium increase every year?

Hong Kong’s insurance industry is very mature, and its overall insurance density and penetration rate are among the highest in the world. However, on 25 August 2021, the Insurance Authority (IA) published findings of the first “Mortality Protection Gap Study”, showing that the overall size of the mortality protection gap in Hong Kong in 2019 was estimated to be HKD 6.9 trillion, which translates to about HKD 1.9 million or 5.7 times weighted average annual income per economically active adult.

The author believes that this is related to the fact that Hong Kong people pay more attention to savings and returns while neglecting risk management. Therefore, it is pertinent to further educate the public about financial planning. In fact, term life insurance with no savings component is an effective tool to quickly fill the above-mentioned protection gap. This article will talk about the premiums and related matters.

Why do premiums increase yearly?

In theory, life insurance policyholders pay premiums to insurance companies and shift their own economic risks of premature death to the insurance companies. Insurance companies, as commercial institutions, price risk and charge a premium for assuming it, and the premium is determined based on the risk level.

Take gender as an example, for people in the same age group, men pay higher premiums than women because women have a longer life expectancy, that is, women of the same age have a lower mortality rate than do men. This explains why the premium for a term life insurance increases year by year, which is also related to risk. First of all, the higher the age of the insured, the higher their mortality rate. Therefore, the premium increases as the insured ages. In addition, to insurance companies, inflation is not only a risk but also the norm. At least, there has been no sustained deflation for years now. Therefore, it is normal for insurance premiums to increase every year.

Why do premiums decrease instead of increase?

While age is indeed an important factor in determining premiums, does that mean that premiums must increase with age? There are certain exceptions. With medical insurance, premiums might decrease instead of increase in some cases. If you’re a parent, you would know that newborn babies are more at risk than children. For example, newborn illnesses and hospital visits are more frequent so the premiums for newborns are generally higher.

As for life insurance, it depends on individual companies and plans, but in general, it is true that the lower the age, the lower the premium. However, the fact that you should buy insurance while you’re young is not just because of the lower premium; risk is unpredictable, not to mention unavoidable. In addition, if you experience a decline in health, you may encounter issues during the underwriting process. It is better to apply for life insurance while you are still in good health such that even if your health deteriorates in the future, it will not affect the level of protection you get. Otherwise, if you contract a health condition, even if you are willing to pay higher premiums, you may be denied coverage. Therefore, those of you in need of the protection may wish to act as soon as possible.

Main points to consider when choosing term life insurance

When it comes to premiums, people often have the following query: since the cost of an annual renewable term life insurance increases every year, isn’t it more economical to purchase term life insurance with a longer coverage? Usually, for long-term term life insurance, the premiums are the same—or “level”— throughout the policy period. Let’s say a 40-year-old man has a 10-year term life insurance policy, for which premiums are paid annually, and during these 10 years, the premiums remain the same every year. Since theoretically, the insured should have a lower risk of mortality at age 40 than at age 50, he has in fact, “prepaid” some of his future insurance costs at a young age. Therefore, in reality, the actual cost of the policy is still rising year-on-year. Of course, a long-term term life insurance offers greater convenience, allowing the policyholder to better budget for the premiums and avoid having to renew the policy.

On the other hand, the advantage of a term life insurance that has to be renewed annually is that it offers more flexibility, and you can adjust the coverage according to your family needs and asset mix. For example, the birth of a child may warrant an increase in coverage, or you may reduce your coverage if your protection gap has been reduced by an increase in your net worth. However, with short-term term life insurance, you’re encouraged to pay close attention to the renewal arrangements. On the whole, whether it is a long-term term life insurance or an annual renewal term life insurance, or even a whole life insurance, it is essentially a tool, therefore, the financial needs that necessitate it and the planning underpinning it cannot be ignored! 

Next article - Factors affecting Premium
Why do men pay more for the same insurance plan than women? Why do annual premium payments have better rates than monthly payments? What are the factors that influence the premium? Whatever is puzzling you, let Bowtie help you out!
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