Term insurance plans see renewed interest

Unlike earlier days when term insurance policies were an important part of the business for life insurance companies, the segment saw a fall in consumer interest recently, when unit-linked insurance plans (Ulips) became more popular and remunerative. The term insurance segment is again seeing a renewed interest, according to industry members.

Term insurance policies are plans where the benefit is provided only on the demise of the insured. If the insurer survives the term of coverage, he has to forego the premium paid all along, unlike endowment policies, where a lumpsum is paid back to the insured on policy maturity.

Neither the regulatory body, the Insurance Regulatory and Development Authority (Irda), nor the insurance companies share details on the number of term insurance policies sold. Term insurance policies usually account for just about 5-10 per cent of the total policies sold by companies. But, there has been an increase in awareness and signs of growth in term insurance business of late, industry members said.

“There has been an increase in term policy sales, especially through the internet. Companies, which were selling not even 100 term policies per month, are now selling 1,000 policies, which is very good for the segment,” said P Nandagopal, chief executive officer, IDBI Federal Life Insurance.

With many companies, such as Aviva, Kotak Mahindra Old Mutual Life Insurance and Aegon Religare, launching term policies, which can be purchased online, there has been a lot of activity in the sector, industry members said.

Apart from online sales, an increase in group term plans, availed by banks to provide cover for their consumer loans and savings bank accounts, are also reasons for heightened activity in the segment, according to Nandagopal. Premium rates for term policies are also cheaper than endowment policies because there is no guarantee of the insured getting money back.

After September 2010, when Irda brought about sweeping changes in the rate structure of Ulips, the products, with lower commission, became less attractive for agents to push. Hence, Ulips, which earlier accounted for over 80 per cent of the sales for many insurers, comprises only 50-60 per cent of the sales for many players now. Hence, apart from other money-back policies, term policies have also benefitted from the Ulip crisis.

“After the Ulip crisis, there has certainly been an increase in awareness of insurance policies for protection and that has helped growth in the term insurance segment in the past few months,” says Mani Kant, vice-president,India Insure Risk Management and Brokerage Services.

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However, there are those in the business who believe that Ulips should purely be seen as an investment product, while term and endowment policies are for coverage and that there cannot be one segment influencing the other.

“From an investment perspective, investors looking for protection alone, would prefer term plans because they offer higher covers at lower costs. Investors, who want protection along with the flexibility to meet anticipated needs over the long term like child’s education, marriage, purchase of a new home and retirement, would opt for traditional or Ulips,” said Suresh Agarwal, executive vice-president, Kotak Mahindra Old Mutual Life Insurance.

IDBI Federal Life's Term Plan for senior citizens

The fundamental objective of life insurance is to replace the policyholder's income and provide financially for dependents in the event of his/her death. Therefore, life insurance is recommended for individuals with income and dependents. Typically, policies have tenure of up to 35 years; if the insured buys the policy at the age of 25, it will offer a cover till he/she retires, post which there would be no income to be replaced.

Now, IDBI Federal Life Insurance has launched a term plan, the Seniors Insurance Plan, catering only to those aged over 50. The maximum age at entry set by the insurer is 85. The company promises to extend the cover without making the proposer go through any medical tests.

Policy term: The maximum tenure under the plan can extend up to the policyholder's death; the premium paying term is till the insured turns 90. The policy can be surrendered after three policy years.

Sum assured : The maximum cover offered under the policy is Rs 5 lakh. It kicks in after two years from the date of commencement. In case of the insured's demise within two years of buying the policy, 125% of the total premium paid will be disbursed to the dependents.

Premium: For a 50-year-old male seeking a cover of Rs 5 lakh, the annual premium would be just over Rs 20,000. If you buy the plan at 85, the premium amount will go up to Rs 2, 13,890 for the same sum assured.

Suitability: The insurer is promoting the product as one that will take care of the insured's spouse upon his death. Some financial planners point out that most individuals fulfill their financial responsibilities before retirement (by the time they turn 60) and, hence, there is no income to be replaced by the cover post this period. Even if the retirement age were to be stretched to 70, they can look at a term policy with a 10-to 15-year tenure. A 50-year-old insurance seeker can obtain a Rs 10-lakh cover with a 15-year tenure under a simple term plan at a cost (premium) of about Rs 6,000.

Why go for it: Earning individuals who have never purchased life insurance but have dependents can look at this policy.

Why you should not: Instead of policies with whole-of-life terms, one can look at regular term policies with a 10- to 15-year tenure as they would charge lower premiums.