Cheap premium should not be the sole

reason to choose an online term insurance

plan

 

With the increasing internet density in India, it has become possible to buy financial products online. This ranges from equity shares, mutual funds and now life insurance. This article deals with online term insurance plans.

Insurance companies are advertising online term plans in a big way. I compiled premium data of few insurance companies offering online term plans and found the rates very competitive. The huge price war in this category has resulted in companies like Aegon Religare, Bharti AXA and Aviva offering life insurance for as low as Rs.4,500-5,000. And, these online term plans come at less than half the cost of the traditional offline term plans.

 

 

Note: Premium Cost Data compiled from Company Online Calculators and inclusive of Service tax, exclusive of additional riders

This low premium is on account of three reasons:

•  No agent costs involved in the absence of an intermediary, i.e., you will directly buy the term plan from the life insurance company.
•  Low operational costs such as storage of forms and data entry.
• Profile of online customers perceived to be carrying low mortality risk as they have the resources for better healthcare and lifestyle.

 

Most term insurance products more or less bear the same features, the only distinguishing factor being the premium cost and customer service. While some buyers may have a bad experience with a particular company, there may be an equal number, if not more, who would have a good hassle free experience with the same company.  So should you buy a term cover based only on a comparison of premium cost?  The ANSWER is a big ‘NO’.  There are many other factors which need to be assessed in conjunction with low premium. In fact, once you shortlist any term plan based on the factors discussed below, then you can compare them further in terms of premium cost.  These factors have been addressed below in detail:

 

1. Claim settlement ratio (CSR): This should be the starting point in selecting an online term insurance plan (or for that matter any insurance plan). If the claim is rejected by the insurance company, the whole purpose of taking insurance is defeated and your family members will be deprived of financial security which you had planned for them. A poor claim settlement ratio (CSR), (40% would mean that 4 out of 10 claims are settled and the rest are refused) would imply that a company does not pay its customers when claims are made.

 

Typically, older insurance firms will have better CSR than the new insurance players. As seen in the table below, LIC, ICICI Prudential and HDFC Standard Life have the highest claim settlement ratio of 97 per cent in 2011-12.

  

 

 

Source: IRDA & Company Wesbite

Early claims made within 2-3 years of buying a policy are rigorously investigated by insurance companies and hence take time in the settlement process (as long as six months). So new insurance companies who have set up shop in around 2009-10 would obviously have claims made within three years of buying the policy.

 

I analysed the repudiation ratios of all 23 life insurance companies for cases greater than 2 years of policy buy. Of these, Shriram (founded in 2007) had the highest repudiation ratio of 31 per cent in 2011-12. This means that of all the claims rejected by the company, 31 per cent were related to cases of greater than 2 years. Its claim settlement ratio in 2011-12 was 65 per cent.

So, in case you come across a company which has been around for at least five years and still has not consistently improved its CSR year-on-year, then it should be a cause for concern. It may be charging very low premiums vis-a-vis its peers but would have a poor claim settlement history. So preferably choose a company which is in the life insurance business for at least five years since its inception and has a high CSR.

 

More importantly, it is also your responsibility to disclose

• your complete medical information
• smoking & drinking habits, if any
• other life insurance policies that you hold

 

If you fill in the online application sincerely and meticulously, there is a good chance that your claim will not be denied.

 

2. Coverage:  Choose a company which gives you the maximum coverage in terms of age. It is prudent to buy a life cover which would insure you at least till the period you retire, i.e, 60 or may be more. For instance, say you buy a life insurance product at the age of 25 and the product has a maximum covering term of 30 years. In that case, your life insurance contract will expire at the age of 55 and you will be left short of 5 years of insurance coverage as you would still be working then.

 

Further, financial responsibilities may not end at 60 in the case of late marriages and having children at a higher age.

Many online term plans come with fixed tenures of 15, 20, 25 and 30 years. There are few companies which offer coverage till the age of 75 while others do not insure you beyond the age of 60. So it is best to opt for a policy that can be customised to your needs.

At the end of the day, what matters to you is your family’s security. Just to save a couple of thousands every year, you do not want to risk your family’s financial requirements in the event of the insurance company rejecting their claim at the most critical time. So shortlist life insurance companies by checking their claim settlement ratio and coverage rather than just comparing their premium costs.