Tuesday, January 10, 2012
Premiums of online term plans have halved in the last few years. But it may not make sense for all to switch
By Deepti Bhaskaran
If you made the sensible Choice or buying an offline term plan a few years back, it may be time to make another sensible choice and drop the plan to buy a new one in the last few years the prices of term plans have almost halved. hence it makes Anemia' sense to switch to an online term plan A few years back, you had to spend about 7500 for a cover or sum assured of 50 lakh. This premium comprised the cost of insurance as well as sundry costs such as agent commission, operational costs and other administrative costs. But thanks to the advent of technology, these costs have shrunk considerably. Now if you buy a term plan online, for the premium mentioned above, the same person can get a cover of 85 Lakh or he needs to pay just 4,550 for the same cover of 50 Lakh.
Explains Yateesh Srivastava, chief marketing officer, AegonReligare life Insurance Co Ltd: 'There are three factors why the costs have come down. First is the distribution Cost: we don't have to pay the agent anymore. Second is the operational cost such as storage of forms and data entry. The third is the profile of online customers. Typically, online customers have a better profile and hence the mortality costs of such customers are lower.'
The other good news is more and more companies are queuing up to offer online term plans. HDFC standard life insurance Co. Ltd recently launched its online term plan and is the ninth insurance company to offer an online plan.
Given the reduction in premium, it makes sense to switch to an online plan. However, this is not a blanket rule that applies to all. Weigh your suitability before you tread that path.
Who should switch?
A term plan is a plain vanilla product that only charges the cost of insurance from you. So if you die during the term of the policy, your beneficiaries get the sum assured; if you survive the term, you get nothing back. Because of its nature-you get pure insurance against a premium-it makes it easier to hop on to a cheaper plan, provided you get one.
If you are below 45 years of age, you stand a good chance of getting online term plan without much problem. Not only the underwriting process of the insurer kind to you, you gain the maximum if you switch at younger age. For example, a 30-year-old will need to pay a premium of 12,236 for a term plan for 30 years, if the policyholder chooses to lapse the policy in the fifth year or when he turns 35 years old and buys an online plan, for same cover he will need to pay a premium of 7,150 for the remaining 25 years. Over the entire tenor, he would have saved about 1.29 lakh by switching to an online term plan. Similarly, a 40 year old will save 1.04 lakh if he makes a switch after five years.
But if you are above 45 years the decision is fraught with dangers. Since the business is about Insuring lives, if you are young and healthy the risk that the insurer takes it less than when you are older. With age also come other lifestyle conditions and that is why insurance companies Insist on strict medical underwriting at you gain years. Says Kapil Mehta, managing director and principal officer, SecureNow Insurance Broker Pvt. Ltd 'For a younger person, switching his term life insurance policy can make senses, rates have fallen sharply, but an older person, typically above 45 years needs to be careful, he may need to undergo strict medical underwriting. His policy can he loaded if his health has deteriorated or he can be denied a cover altogether. 'As a general rule, consider switching if you are young and healthy.
How should you switch?
In order us preclude any risk we suggest you buy an online term plan first and then lapse your offline plan. In buying an online policy you need to first fill up a proposal form and pay the premium. While filling up the proposal form, you will also be required to declare all the existing insurance policies. This Is in order to prevent any misuse of life insurance and to ensure that the sum assured Is not so huge that the policy holder or not able to afford it. Adds Mehta: 'Typically you can get a sum assured of about 25 times your annual income The reason why Insurers don't give more is to ensure that the cover is not disproportionate to your income.'
The process is then taken offline and you may require to undergo a medicaltest as part of the underwriting procedure If the insurer agrees to insure you, your policy document should reach you within 2-7 working days. Only after you get the insurance policy should you lapse your offline policy. Do not pay the premium when it's due after a grace period of a month, the policy will lapse automatically. \
Watch out for
Before you lapse your offline policy, here are a few things you must check.
Look for riders: Typically term plans come with several riders such as critical illness rider, waiver of premium rider and personal accident rider. These riders are available only with offline term plans and not with online term plans. lapsing your offline policy would also mean losing these rider benefits; be sure that you don't need these riders.
Reinstatement: Even as your policy lapses after a month of premium overdue, you can always reinstate your policy. But it is not as easy, saysSrivastava 'You may be asked to undergo medical tests again. The insurer can load your premium or you may he asked to pay a premium for a new age slab. The insurer can also refuse reinstating a policy.'
Ensure you fill up your proposal form accurately to ensure that the policy issuance as well as the claims process is smooth. Unlike an offline policy where you can bank on your agent to fill up information for you, the good part about online policy is that you will end up filling the proposal form yourself.
Switching your term plan is a good idea but be mindful of your suitability to the new plan.