Cheaper term cover may not be the best deal

You must have read a number of times that it’s best to buy a term-insurance policy early in life to avail of cheaper premium rates.

However, cheaper rates should not drive your decision to choose a particular policy as you may not always get the best deal.

The primary reason for buying a term cover should be to take adequate insurance, which should be done through a reliable company.

Term insurance is a pure risk cover taken for a specific period of time. It pays benefits to the nominees of the insured only if the insured dies within that specific period.

If he/she lives beyond that period, no benefits are payable. The premiums on term insurance are much affordable but rise as the person ages.

There are a few things an individual needs to look into before buying a term cover. As the person’s age increases, his/her family responsibilities widen.

The accompanying table shows how premiums keep increasing if the term cover is not bought at a right age, which is when the individual starts earning.

“For individuals who are financially independent with no liabilities, a cover at least 10 times of their annual income could be adequate. But with increasing obligations and assets, he needs to analyse and accordingly take a cover,” says Harsh Roongta, CEO, Apnapaisa.com.

Buying it online:
Buying an insurance policy is definitely cheaper as the agent commissions and distribution costs are almost negligible.
However, if a person buys a product online, it’s his responsibility to initiate the entire process and see that claim settlement is not too tedious for his family on his death. Because on settling the claim, there is no intermediary between the insured and the company, which one may find difficult to track.

Though in term cover, the online settlement of claims should be an easy process, it may still be strenuous as the family has to do all the documentation.

On the other hand, the agent is usually very alert and keeps a track of the slightest change that is required in the policy.

“Since insurance is a push-product, unless an agent explains the product in depth, it is never bought by the customer. Policy servicing and claim settlement are also better managed by an agent, who updates your policy regularly. Thus it’s difficult for insurance to sell online.” says GV Nageswara Rao, managing director  & chief executive officer, IDBI Federal Life Insurance Co Ltd.

Also, the policy needs to be kept updated regularly. For example, job change requires the policy to be updated, because if your premiums are auto-debit from your salary account and you forget to intimidate your insurer about your new salary account, then in such a case the policy may lapse and you will have to start a new policy all together.

Some people don’t mind paying the agent commissions as long as their policy is getting regularly serviced, rather than getting their policy lapsed for such minor reasons. One has to be very alert about his policy if taken online.

“Buying an insurance policy online is 10-15% cheaper than the offline rates, because of various factors like cut in agent commissions, rent & office expenses.” says Elizabeth Venkataraman, CMO of Kotak Mahindra Old Mutual Life Insurance.

Secondly, one has to be an internet savvy as it requires one to pay premiums and complete all the formalities.

Also the paperwork is not reduced as you are still expected to submit the required documents Insurance companies usually send their agents to collect the documents, but not all may provide an agent who could assist you for your medical tests.

Death claim repudiation ratio:
One can get this information on the Insurance Regulatory & Development Authority website. The denial claim ratio tells us the percentage of claims settled by a company. But one cannot take a negative view about companies based on the ratio. At times, it’s also the customer who does not disclose all the information related to his ailments to avoid higher premiums. In such cases, the company may refuse to pay claims on death for not disclosing information about his health.

But across the industry, the insurance companies have to pay claims even if the person has not disclosed certain ailments but has completed two years of buying the policy.

Also, insurance should be bought from a company which has a good brand name and reputation.

For example, there is a difference of Rs4,000 in premiums of Met Life which is an online product against State Bank of India which makes lowest premiums available through their agents.

 “Met Life has a denial claim percentage of 25% whereas SBI has it close to 5%. This means Met Life has managed to settle death claims of up to 75% whereas SBI has done it close to 95%. Only Birla Sun Life, LIC, ICICI Prudential Life Insurance, HDFC Life and SBI Life have claims ratios close to 5%,” said Roongta.

For example, LIC’s term plan might look very expensive but it holds a very good claims denial ratio, which should be of utmost importance to the buyer.

Mortality:
The term-cover premium may vary from company to company also because the main reason being its mortality rate risk. Mortality rate is the number of deaths occurred in a specified age group and time period.

For example, Birla Sun Life offers Rs50 lakh cover for an annual premium of Rs11,650, whereas Reliance Life Insurance offers the same cover at Rs19,652.

“The difference in mortality rate is because every company has a different set of customer profiles and many companies don’t even update their old figures regularly. This can also be a reason why LIC has the most expensive term plan in the market.” says Suresh Sadagopan, who runs Ladder 7 Financial Advisories.

The life expectancy is higher in high income groups as they have access to good healthcare solutions.

Thus, the mortality rate and risks associated with their lives is lesser, resulting in lower premiums against the companies have higher mortality rates.

In case of term covers, the premiums charged are inclusive of the mortality rates and are not shown separately as they are shown in unit-linked insurance products.