LIC joins online play with pure term policy

ET Bureau Sep 3, 2011, 04.47am IST Tags:

Life Insurance Corporation| LIC

MUMBAI: Life Insurance Corporation will sell its policy through the internet for the first time soon with the launch of a pure term plan. "We are in the process of designing a pure term product which would be sold through both online and through agents," LIC's ED- marketing S Roy Chowdhury. "The rates will be lower than what is charged at the moment," he added. LIC currently charges higher premium for its term plans than private competitors. For example, a 30-year-old non-smoker has to pay an annual premium of 7,300 for a 25-lakh policy under LIC's term plan Amulya Jeevan, while she can buy online policies such as ICICI Prudential's iProtect for 3,350 and Kotak Life's e-term plan for 2,750.

A pure term plan covers your life for a specific term. It only provides risk cover and is not a savings instrument. Some distinct features of a term plan are: No bonuses are paid. No loans are given. No surrender value accrues. No survival benefits. On death, the sum assured is paid.

Why term assurance?

The market is flooded with many individual insurance products catering to different needs. But term insurance is the cheapest way of offering your family financial security. You only pay for life risk cover and, hence, premiums are much lower than that for other products. This means you can purchase a higher cover. Most savings-oriented insurance products yield 4.5-6 per cent in run long run. Bank deposits yield the same over three years. If you invest in a risk-free security, such as NSC (National Savings Certificate), POMIS (Post Office Monthly Income Scheme) or KVP (Kisan Vikas Patra), you get a return in excess of 8 per cent.

Agreed, insurance products enjoy tax concessions but, then, so do some small-saving schemes. Therefore, if you want to adequately protect your family from the impact of an unfortunate event and maximise your returns, it is better to go for a pure term plan and look at other avenues for savings. Those investing in a term plan do not take too kindly to the idea that there are no survival benefits. It is, after all, the price one pays for surviving the term of the plan. To overcome this drawback, insurance companies are launching term plans that return the premiums paid during the policy term. So does that mean getting life cover for free. Before you begin to cheer, there is a catch. Premiums paid for a return of premium policy are much higher than that paid for a pure term policy.

Premium back plans vs pure term plans

Let us consider Birla Sun Life's term plan. The premium difference between the return of premiums option and the normal one is Rs 6,740 for a 10-year term for a person aged 30 (100 per cent premium back scheme) assuming a Rs 5 lakh sum assured. If you opt for the with-premium back option, you get a tax-free return of 4.42 per cent on the difference amount for a 10-year investment. If you invest the difference in any other savings instrument instead of paying the insurance company, you can earn a better return. So, it is just an illusion that you do not pay anything for a return-of-premium term plan. It is always better to go for a pure term plan as the cash outflow is low and the cover higher.

Innovative term plans

To offer something different, insurance companies have launched innovative term plans. Some examples are Kotak Mahindra's preferred term plan and ING Vysya's Conquering Life. Kotak Mahindra's preferred term plan is targeted at those who do not use tobacco in any form. The premiums are lower compared to Kotak's regular term plan. The entry age for this plan is higher than other term plans at 25. Should the policyholder pick up a tobacco-related habit after taking the policy and die due to an ailment caused by tobacco use, the beneficiary will still stand to receive the plan proceeds. The plan is also open to women above 25. But the condition of being a non-tobacco user is not applicable for them. (For details, refer Business Line, March 23). To illustrate, the premium for a 40-year-old male for a 10-year term for a SA of Rs 10 lakh is Rs 3,900 under the preferred term plan and Rs 5,777.97 under Kotak's pure term plan. However, the minimum sum assured under the preferred term plan is Rs 10 lakh. ING Vysya's Conquering Life is a term plan with an in-built Critical Illness benefit. On contraction of any of the 10 specific critical illnesses covered under the plan, 50 per cent of the sum assured is paid to the policyholder immediately, and future premium payments are waived. The balance is paid if the policyholder dies during the policy term.No benefits are paid on maturity (for details refer Business Line, February 23). It is an attractive proposition as the premiums paid on the product is lower than that paid for a pure term cover with a Critical Illness rider. Moreover, many companies do not provide critical illness cover with their term plans. But do check the fine-print regarding the illnesses covered, and the terms and conditions under which payment will be made.

How to choose?

The main criterion to choose a term plan is the price. A term plan with the lowest premium is the most cost effective. Apart from pricing, one should also look at such features as term flexibility, age flexibility and riders offered. Most companies offer Death Benefit rider or Death and Disability Benefit rider. For non-smokers, Kotak's preferred term plan is attractive. If one were to look across tenures and ages, Prudential ICICI, HDFC Life and AMP Sanmar offer competitive rates.