Online term plans

DEAR ALL LICIAN

This article is an extract from Money life, may be old but THUMB RULE REMAIN SAME. It is an
eye opener for those who are looking for Low Premium for Term Insurance Plan, who later on
realize & repent for their decision. Lets go further & have a look in details.
Online term plan is a new concept that has grabbed attention due to premiums that are
amazingly low compared to other plans. But, before you fall for the charms of low
priced term plans, think about the many issues that are not so apparent.
If one cell-phone model costs Rs 5,000, and another, with the same features, costs Rs12,000, it
is not hard to see which one you would go for. But if one insurer charges Rs 5,000 as premium
for a term plan and another insurer charges Rs12,000 for a plan with similar features, what
would you do? Your instinct would prompt you to go for the cheaper one. But wait till you
read the whole story
For starters, how about having to face an issue such as this: Are the rates from online term
insurance a bait for customers? Is it less for selling and more for publicity? asked
a Moneylife reader when the cheap premium paid for his online term insurance jumped by
25% after he underwent a medical test. This reader was attracted by the low premium and
had already paid the premium advertised during online purchase. After the medical test, he
was left wondering whether to pay the balance 25% or to decline the insurance offer and
request for a refund (after deduction of medical test cost). Either way, there was a loss.
Another reader had to wait for almost one-and-a-half months for his papers to be collected
by the insurance company and issue the policy document. It took several reminder calls to the
company about the payment that was already made, but the to-be-insured had no policy
contract in hand because the insurer hadnt bothered to collect his documents.

Online term plan is a new concept that has grabbed attention due to premiums that are
amazingly low compared to other plans. Aegon Religare (the plan is dubbed iTerm) is offering
a sum assured of Rs50 lakh for Rs5,350 of annual premium for someone who is a non-smoker
and 27 years of age. It was the cheapest in the market until Metlife launched Met Protect.
And, by all accounts, rates may go lower still. At least, they may not head higher.
Aviva Life Insurance recently launched its i-Life online term plan with a minimum cover of
Rs25 lakh with no upper limit and a maximum term of 35 years. At Rs4,046, the premium is the
lowest in the market today (20% lower than its next competitor) which points to a clear trend
of premiums becoming even more unrealistic, but offering a bonanza for customers.
By contrast, a similar term plan, (bought offline) from Life Insurance Corporation of India (LIC)
would cost you Rs12,650. (See the table for a comparison of premium and other features).
Online term plans have suddenly become irresistible for those who understand the
importance of the purest and best form of risk protection, and who also know that they should
not mix their investments and insurance. But, before you fall for the charms of lowpriced term plans, think about the many issues that are not so apparent.
Start with the premise that there are no free lunches in this world. Instead of grabbing the
online term plan from Aviva, Metlife or Aegon, think about the pitfalls and downside. Ask
yourself: how is it that new entrants and loss-making companies like Aegon and Aviva are
able to offer something that LIC, which is profitable and has been around for decades,
cannot? Are they indulging in predatory pricing? If so, what are the implications for you?
Indeed, low premium is only one factor in the insurance process. Going for the cheapest
would be justified if your claim is processed and paid without hassles. If there are glitches in
claim processing for no fault of yours, even the lowest premium becomes a dead loss. This is
so not only because the whole purpose of taking a cover is defeated, but also because of
what is called an opportunity lossif you were with another insurer, you could have got your
claim accepted, though the premium you paid would have been higher. Clearly, the capacity
and intention of the insurer to pay a claim is more important than the low-priced product it
is offering. Remember, unlike the products and services that we use (which offer instant
performance to the buyer), a financial product, especially an insurance policy, is only a

promiseone of payment to the nominee if the buyer expires. Life insurance purchase
should give you peace of mind and not sleepless nights wondering if the insurance
company will really pay at the moment of truthyour death claim. There is no easy way to
figure out in advance whether the insurance company will reject your claim(s) or not. We can
start by examining whether the current online term plan premiums are unrealistically low.

A 200% variation!
The table shows the wide variations in the rate for term plans bought online and offline, not
only between two insurance companies, but also between online and offline plans of the same
company. How can a policy of Aviva carry a premium of Rs4,046 and that of LIC carry a
premium of Rs12,650200% more! According to Deepak Yohannan, chief executive officer,
MyInsuranceClub.com, The large variations have come about as a result of the launch of
online term insurance plans. It is probably for the first time that a price war is being played out
in the life insurance segment. We have seen the same in other financial products and even
in general insurance, but never in the life insurance segment. This is clearly because of
increased competition and the desire to break into a large untapped market. These are very
good signs for the consumer as huge financial savings are being passed on to the customer. It
was Aegon Religare which started this with the super-innovative iTerm plan. The rest are being
forced to follow and rightly so.
V Viswanand, director & headproducts and persistency management, Max New York Life
Insurance, says, Premium amounts for term plans are derived by assuming certain critical
factors such as level of expense, commission, cost of life cover, investment return on assets,
persistency and allowing for a certain level of profitability. These assumptions vary across
companies and are usually dependent on the way the business is procured. The underwriting
strategy of the company is also an important factor in the determination of prices.
Sanjay Tripathy, executive vice-president and head of marketing and direct channels, HDFC
Life, has the same explanation: Key factors such as expected mortality rates, operating
expenses, persistency expectations and underwriting standards are taken into income
(calculation) for deciding upon the premium for our term plan. Our premiums reflect our
current persistency and claims experience. In fact, we are in the process of refining our term
plan premiums. Comparison of online term plans against regular term plans is not appropriate

since the underlying demographics for both the products are very different.
But these are general statements and may create more confusion. A keen buyer would ask:
Why would assumptions on expenses, cost of life cover, investment return and persistency
differ so widely across companies which are all drawing upon the same data and working in
the same economic environment? Are insurance companies throwing darts? On another note,
what makes online plans so much cheaper?
Policybazaar.com mentions on its website, ICICI Pru iProtect term plan is an online term plan
which is cheaper since you save on agents commission. This too is a half-truth. The highestpremium (not online) term plans in policybazaar.com are four times more expensive than the
lowest premium online term plans. The agent commission of 30% to 40% of the first premium
cannot account for this difference. Moreover, in subsequent years, the agent commission is
only 2% to 7%. It does not justify such a big difference in premiums for the full policy term.
Frankly, if commissions accounted for such a high difference, why cant online mediclaim
products offer such huge discounts?
IndiaFirst Life Insurance has launched an online term insurance Anytime Plan to compete
with the likes of Aegon Religares iTerm. According to Dr P Nandagopal, CEO & MD, IndiaFirst
Life Insurance, Commission and expenses are not the main reasons for such a big difference
in premium. Here is the main reason, according to him: The expected mortality of the
targeted segment is one of the main reasons for low premium for online products. Insurers
expect net-savvy, financially-secure individuals to lead a healthy lifestyle and also to have
access to better hospitals so that the person lives a longer life even if it means lying in a
sickbay. The preferred customers will be from software, the financial services field and other
well-paying careers. The other aspect is that educated, savvy people understand the
importance of proper declaration of medical conditions as well as giving correct information in
the proposal form. There have been studies in mortality experience among different groups
within the same organisation and it has been observed that mortality for employees with
lower rank are sometimes as high as four times the mortality for the higher ranked employees.
Customer segmentation makes a huge difference in the premiums offered by insurers.
An online customer is presumed to be of better quality as s/he has better access to health
care and quality of life which is reflected in the vast difference in the mortality rates of
online term plans. The other aspect is the distribution cost (in the form of commissions, etc),

which is not loaded in online term plans. Many insurers offer these plans only for certain cities
so that they narrow down the customer segment and avoid rural areas where mortality rates
will be higher. Aviva Lifes i-Life online term plan is available only in 33 cities.
ICICIs Pru iProtect online is offered only in 55 cities in India. It can be purchased offline in
other places in India, but at an additional premium. Customers living in locations prone to
natural calamities or having hazardous occupations will have to pay extra premium. Women
pay 15% to 20% less premium than men. According to Mr Viswanand, Max New York Life
Platinum Protect term insurance has introduced three underwriting categories based on
lifestyle to provide better rates for maintaining a healthier life. An individual can avail of up to
36% reduction in premium rates depending upon his lifestyle.
If an insurance company is selective about its customers, there is bound to be a better claims
experience. LIC, on the other hand, has its customer base spread out all over India and its
clientele is a truly heterogeneous group. The wider the group, continuous mortality experience
will be surely on the higher side. There are other factors that may allow an insurer to offer
lower premium rates. It could be due to reinsurance of their portfolio by the life insurer. An
insurance company reinsures approximately 90% of the high-sum assured policies. A reinsurer
has a bigger base across different countries to mitigate its risk, but it can still get squeezed if
due diligence is not done while reinsuring.
According to Chandan Khasnobis, appointed actuary, IndiaFirst Life Insurance, IRDA
(Insurance Regulatory and Development Authority) reduced the solvency margin of term life
insurance from 0.3% of sum assured to 0.1% of sum assured in March 2008. This meant that
insurers benefitted (they could hold lower reserves) and, hence, could afford aggressive
premium pricing.
The other reason could be that a new entrant into the insurance business may be
excessively keen on market penetration and may price its products at a loss. Mr Viswanand
adds, The other aspect and probably the most important one is a companys business
philosophy which links to profitability assumptions for pricing products. Some (insurers) may
believe that once a customer is acquired through a lower-priced product, they can cross-sell
other profit-making products to the customer. However, others may believe that a term
product has to be profitable by itself.

If you listen to Rituraj Bhattacharya, headproduct development, Bajaj Allianz Life Insurance,
an important factor to bear in mind is that prices from the same company may vary due to
changing conditions and assumptions. We launched New Risk Care II in 2008 when the
assumptions in terms of mortality, reinsurance terms, interest rates and expenses were
different from now. This kind of pure term plan would require frequent re-pricing in order for
a player to stay competitive. We may launch a pure term plan by tweaking some of the
features in current plans. Moreover, issues like the channel of distribution opted (through the
Internet, brokers or individual agents) and targeted segment can impact the premium rates,
he says.
A big game changer will be when LIC brings in its online term insurance products. Term life is a
minuscule business for LIC and its brand value is enough to pull customers who will not settle
for anything other than LIC term life insurance. An online term plan of LIC will give us the best
picture of pricing.
Understated mortality charges?
One of the most important components of the price of term plans is assessment of mortality.
Life insurance companies use the Indian Assured Life Mortality Table 1994-96 prescribed by
IRDA for calculating mortality charges. However, the mortality factor used by Aegon Religare
iMaximize ULIP is much lower than what is suggested by this table. The number of claims for
each life insurer may be different from what the industry perceives as the average. Therefore,
insurers are allowed to base their mortality rates on their own claims experience. (See Table:
iTerm vs iMaximize Charges).
The most surprising conclusion is that the premium on Aegon Religare iTerm in the 25th year is
lower than even the first year mortality charges for its own online ULIP! In both cases, there is
no agent (online) and the profile of customers is the same; hence, such a huge difference in
the mortality charges between online term policies and online ULIPs is baffling. Either the
customer is paying unrealistic low premium for online term insurance or s/he is paying too
much for ULIP mortality charges. We asked Aegon Religare about this glaring discrepancy, but
they did not respond to our queries.
It is not just Aegon Religare; all the low-priced online term plans have the same feature. There
could be a case for non-online ULIPs to charge higher mortality charges. It has got to do with
the customer segment (larger population), less stringent underwriting, lack of medical test in

many cases due to low sum assured and the ULIP customer being more interested in
investments rather than insurance. But all that should account for 20%-30% higher mortality
charges for ULIPs. Add that, and the online term insurance premium still looks unrealistically
low.
Last September, IRDA came up with a new set of guidelines for ULIPs. Mortality charges were
left out of its ambit; hence, insurers could escalate them by 10% to 20% and recover the
charges from the customer. How many ULIP customers know about how much of their
premium is going towards mortality charges? After all, it is not as transparent, as the premium
for term life is one amount to be paid annually, whereas the ULIP has changing mortality
factor every year.
Too good to be true?
Moneylifes analysis of the factors that contribute to making online term plansinexpensive
indicates that the scenario is almost too good to be true and may not last. Mr Yohannan of
MyInsuranceClub.com says, There are sceptics who scoff at this (online term life premium),
claiming it to be unsustainableonly time will tell. At least it has forced the large players to sit
up and play the game with the new rules being set by others. Complete disruptiveness is at its
best and I think the life insurance industry will see a lot more and it will not all be restricted
to pricing.
Mr Khasnobis of IndiaFirst Life Insurance elaborates, Online term life insurance premiums are
bordering on the aggressive, if not overly aggressive. They have no track record and hence
only time will tell who is right and who is wrong.
Moneylife spoke to different people from the insurance industry, including actuaries. Could
cheap online term life premiums become unviable if the assumptions go wrong? And there
are far too many assumptions that can go wrong. The fact is that the mortality tables of 199496 are based on LICs experience over several years. The scientific basis of the tables is being
undermined by assumptions that may not hold true. The new mortality tables are going to be
released soon to replace the Indian Assured Life Mortality Table 1994-96 which are expected
to witness a drop in mortality charges by only 15% to 20% due to higher life expectancy. There
could be an increase in mortality rates in younger ages due to higher rates of accident deaths
and lifestyle-related diseases.

IRDAs 2009-10 statistics show that 2% of policies can lead to death claims. The number of
policies sold in 2009-10 was 53.2 million and the number of settled death claims was
726,000 (individual) and 306,000 (group). What if online term plans lead to 2% death claims?
Insurance companies would make lossesthey simply wont have enough money to pay for
death claims. This could lead to high claim rejections, unless, of course, promoters infuse
more capital and new business premium collections become robust. There is nothing to
suggest that an insurer will deliberately reject claims, but some may be temped to use
technical grounds for rejection.
If insurance companies suffer losses on cheap term online plans, they may quote some fine
print and reject claims. Should you worry about it? We have to assume that if a customer buys
life insurance in utmost good-faith, there is nothing to worry. Make sure you disclose health
conditions, family medical history, details of occupation, and other insurance policies. Also, fill
the proposal form yourself and get any incorrect information on the policy document
corrected. Life insurance companies can even repudiate a claim if the policyholder dies in an
accident, if the policy was purchased with false information about smoking. The accident
may not have any relation with smoking, but it is a technical point which will be used for not
paying the claim. It is not uncommon for the insurer to ask for the nominee to provide proof
of relation with the deceased policyholder and even verify past medical records at the time of
a death claim.

The repudiation ratio is crucial because lower claims denied especially for a company in
business for a long time is good from the customers point of view.
The missing data is repudiation of claims by insurers for early claims (within three years of
buying insurance). LIC pays 95% of non-early claims within 15 days and has about 5% of early
claims repudiated. According to industry experts, early claims should not have a repudiation
ratio of more than 10%. Poor underwriting standards, lack of health condition disclosure and
fraudulent claims could be some of the reasons for high repudiation ratios. It is difficult to
comment on repudiation ratio of newer insurers without having cases of claim repudiation
reversed by higher authorities. Customers will have to make their own decision about
purchase of life insurance products.
So, what should you do? Low online premium for term insurance looks like a good deal. But
ease of purchase and lower premium that online terms offer should be the last factors on your
mind while buying life insurance. However, if you fulfill the criteria set by online term life
insurers to get the online premium quoted, can trust private insurers, are ready to go through
the hassles of getting an online term insurance policy issued, find LIC premiums unaffordable,
and dont need an agent, then go with online term insurance. Else, go for LIC or any other
insurer by paying higher premium. Remember, life insurance is not optional for most of us; it
is a necessity. So, it is important not to take chances.
Hope the above article has thrown the light on key areas of customer decision on term plan
PRADEEP PATIL