Term insurance by design is cheaper than all other kinds of insurance plans because it is a pure risk plan with no returns.
Till about 5 years back, term insurance could be bought only through an intermediary (agent / bank/ corporate agent/ broker, etc.). However in 2009, Aegon Religare launched India’s first online term plans. Today, there are more than 15 life insurance companies that offer online term plans of various types.
There are 5 reasons why online term plans in India are cheaper than offline.
1. No Agent, so No Commissions
This reason contributes to 15-18% of the overall reduction from offline premium.
Term Insurance plans are very simple to understand. All you need to calculate is how much life insurance cover you need. This simple product does not need the services of any agent to explain how it works. So those who are familiar with buying products online (travel tickets, electronics, clothes, even groceries, etc.) are comfortable buying online term plans through the internet. The insurance company saves the commission (about 30% of first year premium, 5% after that on an average) that it would have otherwise paid to the agent. They can therefore choose to pass on this reduction back to the customer through a lower price.
2. Application Processing Costs are Very Low
In the case of online term plans application, there is no physical form that is required. You do not need any physical branch of the insurance company, no company person is required to check the form, or enter the application form details into the company’s database. All these are really big costs for insurance companies.
When you buy online term plans, it is you who are doing all the work directly putting the data into the company’s computer system and database. You are effectively saving a lot of these costs, and this reduction is also passed back to you in the form of lower premium.
A reduction of about 2-3% from offline premiums is achieved for this reason.
3. Quality of Disclosure is Better
Let me first tell you what I mean by disclosure. When you apply for term plans in India, there are questions you need to fill about yourself, your family history, your lifestyle, your current health and past, your occupation, etc. Better the level of detail you fill, greater are the chances that once your policy is accepted, your claim if it arises will be easily settled. The level of information you fill is called disclosure, and high disclosure is a good thing from you, the customer’s point of view.
In the case of a physical application form, it is mostly an agent or bank executive that might fill up the form. Now he/she may not take the effort to put it all the details, and may skip a few questions in the bargain, some of which could be important at the time of claim settlement.
This may sound like a small thing, but understand that when buying online term plans, you get 100% opportunity to declare everything that you can. And online customers like you are already doing that. Insurance companies (and re-insurance companies) give a lot of weightage to this fact. This greatly reduces the risk to the insurance company compared to the risk of the offline term plan customer. When the risk is reduced, the premiums are reduced as well.
4. Online Term Plans get Better Mortality Premium Rates
Insurance premium rates depend a lot on customer segments or customer “classes”. The premium for a customer class depends on factors such as age, gender, location (country), occupation, income, lifestyle, habits, family history, health, etc. among others. So a Railway employee buying term insurance from an agent in Alwar will have a different (higher) risk premium rate compared to an export manager in Pune buying online term plans through his laptop. This means a lower premium rate for the online customer.
Also, some online term plans are made available only in certain cities (sometimes due to operational ease as well).
In a sense, this is reflected in reason 3 above as well. In my opinion, between reasons 3 above and reason 4, about 18-20% of the overall reduction from offline premium rates can be attributed to this factor.
5. Some Companies may have Low Running Costs and/or Choose to Keep Profits Low
Insurance companies see online term plans as a key growth category in life insurance in the years to come. This category provides high value to companies when they acquire maximum customers through a robust process. To be able to do so quickly, some insurance companies may choose to keep their overall profit margins minimal.
Also, some companies have lower cost of operations compared to some others which allows them to price all their products lower than others.
The above can also mean about 3-5% lower insurance premium for online term plans.
Conclusion
Term insurance plans in India are best compared and bought online rather than through an agent.
Make sure you read these important points before you apply for an online term plan. Also ensure you know what kind of term plan and how much insurance cover to take which will suit your needs best.
