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How do insurance companies offer a life cover till the age of 99 years
Mar 15, 2019 | 1039 VIEWS
This is a question which must be lingering in a lot of minds. Also, many of our subscribers have asked this question. How is this even possible? Am I being fooled into something?

If you don’t really get into the maths of it, the propositin does sound a bit ridiculous. But in reality it isn’t really something which the insurance companies have not thought through really well. I will explain this with the help of an example.

So let us see this with the help of this scenario:

Age of policyholder - 35 years
Cover Amount - Rs. 1 crore
Policy Term - Till the age of 100

For the above case, the annual premiums from a company which offers very low pricing comes to Rs. 12,524 + taxes.

Annual Premium - Rs. 12,524 + taxes

So effectively in 65 years, you will be paying 65 x 12,524 = Rs. 8,14,060 to the insurance company. So how can the insurance company offer you a cover of 1 crore which is almost a guaranteed payment. After all, most people will not survive till the age of 100 years.

So here is what happens? The money paid by you is invested by insurance companies and they generate returns on it. Indian insurance companies have very tight guidelines on where policyholder money can be invested, and they are constantly monitored by the regulator. The money you are investing is pretty long term, so let us assume that the insurance company is being able to generate an investment return of 8% every year. 

Investment Returns - 8% every year

Do you have any idea, what this will do to your annual premiums in 65 years? Well, your money will become Rs. 2.5 crores in these 65 years. So paying 1 crore to you should not be much of a problem! 

Of course, there are other factors which make it more favourable to the insurance companies like the number of people stopping the renewals a few years after retirement. You really need to think if you will be paying insurance premiums at the age of 85 when you are living completely out of your retirement income. 

Also, just in case the insurance company can make an investment return of 10%, the amount at the end of 65 years will be Rs. 6.7 crores. So hopefully that should clear the doubt which some of you may be having.

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