BackTerm plans get heavy on features
With more people buying term plans online, insurers are starting to offer attractive variants
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Who would have thought people would line up to buy life insurance? After all, conventional wisdom suggests that life insurance is sold and not bought. And when it comes to term plans—insurance policies that charge for the cost of insurance but don’t have investment benefits—the selling gets even tougher. But the advent of online term plans has challenged this notion. People are buying term plans on their own just as they would a flight ticket, and insurers are lining up to offer term plans online.
The initial attraction of online term plans was price. The insurer is able to save on administrative and distribution expenses and this saving gets passed on to you. This makes online term plans much cheaper than offline plans—the difference can even go up to as much as 60%.
Now insurers are going beyond price and are looking at innovative features to catch your attention. Says Anisha Motwani, director and chief marketing officer, Max Life Insurance Co. Ltd: “Cutting each other in price beyond a certain point is not feasible. So, to make term plans attractive online there has to be some sort of a value-add. It’s like the beginning of e-commerce sites, when they captured your attention with the cheapest tag, such as cheapest flight tickets, and then came value-adds like holiday packages. We, too, are looking at value-adds in the life insurance online space."
Sum of all parts
One such innovation is to stagger the sum assured or death benefit and offer regular payouts instead of just a lump sum payment. “Most nominees are not experts at financial management, and may be influenced by relatives once they have a large sum. The family, for whom this is mostly meant for, may not receive the true benefit of the lump sum. So, regular pay plans are useful. Nominees may not understand why they need a 50 lakh cover, but they easily understand why they need 50,000 a month," says Yashish Dahiya, chief executive officer, Policybazaar.com, an insurance Web aggregator.
Mint Money explains two such online term policies that offer regular payouts for a certain number of years.
Max Life Online Term Plan: This is the first online term policy by Max Life Insurance and it has three variants. The basic policy is a simple term plan—if the policyholder dies during the tenor of the policy, the nominee gets the sum assured; if the policyholder survives, there are no maturity benefits.
The second variant, called “sum assured plus level monthly income", pays the sum assured immediately upon death and then a monthly income (0.4% of the sum assured) from the beginning of the next policy anniversary, for 10 years.
The third variant, called “sum assured plus increasing monthly income", pays the sum assured and subsequently, a monthly income of 0.4% of the sum assured in the next policy year. The monthly income increases by 10% on a simple interest basis every year for the remaining nine years.
We like the fact that the base cover lets you buy a substantial amount of cover and gives you the option to ensure monthly income for the nominees for a certain period of time. Coming to price, this policy is fairly competitive.
For instance, in the third variant, the annual premium for a sum assured of 1 crore for a 35-year-old and a tenor of 25 years would be about 14,300. Keep in mind that apart from the lump sum payment of 1 crore, the policy will pay a monthly income of 40,000 in the next policy year and that this amount would increase by 4,000 every year for the remaining nine years.
A premium in the range of 14,000 is quite competitive considering that in the market, the cheapest premium for a sum assured of 1 crore would be about 9,500 and 18,000 for a sum assured of 1.696 crore (1 crore plus monthly payments).
Aviva i-Life Secure: This plan by Aviva Life Insurance Co. India Ltd breaks the sum assured into one lump sum payment and subsequent annual payments for 15 years. So, if you buy a sum assured of, say, 1 crore, on your death, your nominee will get a lump sum payment equal to 10% of the sum assured, that is, 10 lakh. The remaining 90 lakh will be staggered over 15 years and paid at each death anniversary. This means that from the next policy year, the insurer will pay 6% of the sum assured (6 lakh) annually for 15 years.
“Online term plans typically have high average sum assured in the range of 75 lakh to 1 crore. There is a distinct segment of customers who are uncomfortable with a lump sum money getting in the hands of the nominee at one go. They feel the money may not be managed well and are comfortable with the idea of the money coming in the form of a regular income," says Rishi Piparaiya, director, bancassurance and marketing, Aviva Life.
“So this plan offers a lump sum payment of 10% to meet any immediate expenses and then staggers the rest in the form of an annual income for a period of 15 years. But the policy also allows for a lump sum payment in case the nominee would prefer it this way. The nominee is free to choose the option of receiving regular income or lump sum payout at any point during the policy term," says Piparaiya. If the nominee opts for a lump sum payment, all the outstanding instalments are discounted at a rate of 9% and paid as lump sum.
In the example above, if the nominee opts for a lump sum payment in the beginning, she will get 58.36 lakh. The nominee can opt for a lump sum anytime during the payout phase.
The premiums in this plan are on the cheaper side. For instance, for a sum assured of 1 crore for a 35-year-old and a term of 25 years, the base premium in this plan would be about 8,000.
Of course, one can’t strictly compare the premiums as one policy offers lump sum benefit while the other staggers it. But if you opt for the lump sum benefit in Aviva i-Life Secure, you will get about 58.36 lakh for an annual premium of 8,000. In the market, you would get a similar cover for 6,000-7,000.
This comparison shows why you must evaluate the needs of your nominee before you settle for this or any other plan.
What should you do?
Online term plans will get more competitive as more plans are likely to hit the market soon. “Many companies have filed deferred pay plans. It’s going to increase choice and will expand the online market," says Dahiya.
Now, it’s time for you to choose a suitable term plan based not only on the price but also features.
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