Switch to an online term plan, pay less
Premiums of online term plans have halved in the past few years, but it may not make sense for all to switch. Deepti Bhaskaran writes.business Updated: Jan 14, 2012 00:47 IST
If you made the sensible choice of 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 financial sense to switch to an online term plan.
"There are three factors why the costs have come down," said Yateesh Srivastava, chief marketing officer, Aegon Religare Life Insurance Co. Ltd. "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."
A few years back, you had to spend about Rs 7,500 for a cover or sum assured of Rs 50 lakh. Now if you buy a term plan online, for the premium mentioned above, the same person can get a cover of Rs 85 lakh or he needs to pay just Rs 4,550 for the same cover of Rs 50 lakh.
Given the reduction in premiums, it makes sense to switch to an online plan. However, this is not a blanket rule that applies to all.
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 an online term plan without much problem. Not only is the underwriting process of the insurer kind to you, you gain the maximum if you switch at a younger age. For example, a 30-year-old will need to pay a premium of Rs 12,326 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 the same cover he will need to pay a premium of Rs 7,150 for the remaining 25 years. Over the entire tenor, he would have saved about Rs 1.29 lakh by switching to an online term plan. Similarly, a 40-year-old will save Rs 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 is less than when you are older.
How should you switch?
In order to 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.
The process is then taken offline and you may require to undergo a medical test 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.