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Should you let your term plan lapse?

Should you let your term plan lapse?

Only if you can buy a new policy with a bigger insurance cover for the same price. Of late, term plan premiums have come down and online plans are far cheaper.

Some people never learn. Two years ago, Noida-based businessman Manoj Jain missed a premium of his term plan. It was a costly mistake because the policy lapsed and he had to buy a new one at a higher premium.

"I had bought the plan when I was 38 years old. The new plan was taken when I was 42, so the premium was naturally higher," he says. Now, Jain wants to terminate that plan and buy another. Only this time he will be save on the premium rather than pay a higher price.

Jain intends to buy an online term plan, wherein he will deal with the company directly without having to go through an agent. The premium of these plans is lower because the company passes on the savings on distribution costs to the customer.

"Indians are generally underinsured, but the average life cover of the online policies we have sold in the past one year is worth Rs 65 lakh"
Rajiv Jamkhedkar
CEO, Aegon Religare Life Insurance
Jain pays Rs 7,800 a year for a cover of Rs 15 lakh till he turns 60. He can get a bigger cover of Rs 25 lakh at the same price if he buys online. At least five companies provide online term policies and more such offerings are in the pipeline.

"Online term plans empower customers to design their protection plan with the least effort and in the shortest time," says Rajesh Relan, managing director of MetLife India Insurance Company. Metlife launched its online term plan in October this year.

The other benefit of such plans is that the cost goes down as the cover goes up. A cover of Rs 25 lakh will cost a 25-year-old only Rs 3,000 a year. But a Rs 50 lakh cover will be cheaper at Rs 4,800 a year. This way, online term plans encourage buyers to take a higher cover.

"Insurance is about protection. The average life cover of our iTerm online plan is worth Rs 65 lakh," says Rajiv Jamkhedkar, chief executive officer, Aegon Religare Life Insurance, which pioneered online term plans in November 2009.

The company has sold more than 10,000 online policies in the past one year, with an average cover worth Rs 65 lakh. The overall average cover is worth Rs 1.10 lakh.

Even without the online version, term plan premiums have come down significantly during the past two years, thanks to the growing competition in the insurance space and the improving life expectancy figures in India.

The average Indian now lives up to 64.5 years, compared with 55.1 years in 1980 or 58.3 years in 1990. Many insurance companies no longer assess risk on the basis of the LIC data on life expectancy, which dates back to the 1970s.

Before you junk your existing policy, make sure that the new policy is in force. The premium quoted online may appear attractive, but you may eventually have to pay a higher price if you don't clear the stringent medical tests that prospective customers are subjected to by insurers.

Shailesh Phule knows this well. He wants to switch to a cheaper online term plan, but is wary of the premium being pumped up because of his family history of diabetes and heart condition.

Shailesh Phule, 42
Financial dependents: Five
Term cover: Rs 10 lakh for 24 years
Premium: Rs 7,500 a year
Online offer: For Rs 8,600 a year, he can get a bigger cover of Rs 25 lakh for 24 years.
Our advice: Phule should buy the new plan before he terminates the existing policy. The family history of diabetes and heart ailment could push up the premium and make the switch unviable.
'I do need a bigger insurance cover. The online plan is attractive because of the low premium, but I will go through the terms carefully to see if there is a catch'

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