Insurers Turn to Term Insurance to Protect Profit Margins

Mumbai: Rising consumer awareness, affluence, and insurers' focus on protecting their profit margins after the revised surrender value norms took effect last October have led to an uptick in the demand for term insurance covers. Riders remain an integral part of term insurance plans for affluent buyers, with critical illness cover, accidental death benefit, and waiver of premium being the most popular options.

Private life insurers saw a surge in retail sum assured by 41 per cent year-on-year (YoY) from April to December 2025, compared to 30 per cent during the same period in FY2024. This growth outpaced the retail new business premium growth of 17 per cent (7 per cent in FY2024).

The retail sum assured per policy for private insurers rose to Rs 24 lakh in FY2024 from Rs 13 lakh in FY2018. However, for LIC, the retail sum assured per policy has remained stable at Rs 3 lakh. The group sum assured also saw significant growth, driven by the expansion of credit life insurance, which has been bolstered by robust credit growth in the retail segment (a compound annual growth rate of 18 per cent from FY2021 to FY2024), particularly in unsecured loans (CAGR of 21 per cent), where credit life penetration remains higher. Credit life insurance is a type of life insurance policy that pays off a loan if the policyholder dies before settling the debt.

Nilesh Sathe, former member (life) of the Insurance Regulatory and Development Authority of India (IRDAI), explains: “Term insurance is a profitable business for life insurers, as the risk is largely passed on to reinsurers. Secondly, the rising middle class is becoming more financially aware, recognising that term insurance is necessary for risk coverage rather than as a savings product. Last but not least, the new revised surrender value norms, effective from October 1, do not apply to term insurance and ULIPs, which is why insurance companies are promoting them more than high-value non-participating (non-par) products.”

Under IRDAI’s surrender value norms, effective from October 1, which apply to traditional non-participating life insurance policies, insurance companies are now required to pay a special surrender value once policyholders have completed the full premium payment for the first year. This has impacted life insurers' margins. It also marks a shift from previous regulations, which did not provide a surrender value in the first year and only allowed payments after two years of premium payments. Additionally, IRDAI has significantly reduced surrender charges on traditional savings plans. The norms also stipulate that the discount rate for calculating the Special Surrender Value (SSV) can be up to the 10-year G-Sec yield plus 50 basis points, compared to the previous norm, which used only the 10-year G-Sec yield.

While Life Insurance Corporation of India (LIC) continues to dominate the market with a substantial share in retail and group new business premiums, private insurers lead in terms of sum assured. In the nine months of FY2025, private players accounted for 84 per cent of the retail sum assured and 80 per cent of the group sum assured, significantly higher than their market share of 63 per cent and 28 per cent in retail new business premium and group new business premium, respectively.

Life insurers have also shifted from high-value non-participating (non-par) products to lower-margin unit-linked investment plan (ULIP) products following the insurance regulator's revision of the surrender value norms from October 1. According to ICRA, pressure on the value of new business margins is expected to persist, leading to increased sum assured and rider attachments as insurers attempt to offset the negative impact of the product shift.

Last month, a survey by Policybazaar, the largest insurance aggregator, found that top metro cities such as Delhi NCR, Bengaluru, and Mumbai — where affluent and financially aware individuals are concentrated — are driving term life insurance sales, followed by Hyderabad, Pune, and Chennai.

High-salaried individuals earning between Rs 15 lakh and Rs 40 lakh per annum now make up 15 per cent of all term insurance customers, with their contribution growing at a remarkable 30 per cent YoY. The average sum assured for high-salaried individuals has increased by 20 per cent over the past two years, reaching nearly Rs 2 crore, with key motivations including ensuring financial stability for their families, home loan protection, and legacy planning.