If online platforms offer convenience when you buy stocks or IPOs, they can save you a packet when buying insurance. An array of insurance products in the life and general insurance spaces are issued online. Agent commission, which is a significant proportion of the cost associated with an insurance product, is not charged while buying policies online but is passed on as a discount to the buyers. Buying life insurance and ULIPs online is typically much cheaper than the offline versions; in general insurance, the advantage is mainly the convenience that online buying offers.
For instance, HDFC Standard's Endowment Super Suvidha (Spl), a unit-linked insurance product, promises 40 per cent lower cost on online purchase.
Here we look at a few offerings to find out how much is the cost savings on a term policy and ULIP policy bought online. When they say online, does it mean there is no documentation at all? How do online insurers deal with medical tests? We try and address some of these queries.
Aegon Religare (Aegon Religare iTerm) and ICICI Prudential (ICICI Pru Pure Protect Classic – maximum sum assured offered is Rs 15 lakh) are offering term life policies online.
Investors in both policies save substantial sums on the annual premium (for the same life cover) when they buy the policy online rather than through the normal route. For a Rs 50 lakh policy for a 30-year male over a 25-year term, Aegon Religare's online iTerm policy charges a yearly premium of Rs 5,600. The same product when bought offline with Aegon Religare would have a yearly premium of Rs 11,360.
Mr Yateesh Srivastava, Chief Marketing Officer of Aegon Religare, says that they are able to offer competitive rates due to savings in distribution commission and lower reinsurance cost on its online product. The latter arises because the age profile of people who take the online route is typically lower.
Online buyers do need to go through some minimum documentation process – signing of the insurance agreement and filling in key details personally is required as per the KYC mandate of IRDA.
Another misconception about online life policies is that they do not ask for medical tests from the buyer. Though insurers advertise this as one of the highlights of the product, it does not apply to all insurance buyers. For buyers in the higher age groups or in higher risk categories , medical reports are required to be provided even for online policies.
Major portion of premium paid in ULIPs in the first few years (between 15 per cent and 100 per cent of the premium in the first year) goes towards premium allocation charge (which is partly or fully used to pay the distributor's commission). Online ULIP buyers can, however, secure cost savings by way of reductions in this premium allocation charge.
HDFC Standard, Bajaj Allianz and ICICI Prudential are offering ULIPs online. All these insurers give discounts on premium allocation charge (the service tax component too is lower as a result). For example, to take a few online products, in ICICI Pru's ULIP (ICICI Pru ACE), the premium allocation charges are nil; in HDFC Standard Life's ULIP, premium allocation charges are 10 per cent and 5 per cent of the premium paid in the first and second year as against the 15 per cent and 10 per cent for the offline versions.
However, online buyers of ULIPs need to note that the policy administration charges may be pegged higher, offsetting some amount of benefits derived from savings on premium allocation cost. As a larger proportion of the premium is invested from year one, the fund management charges also tend to be higher from year one.
Lower costs and the higher sums allocated to investments in initial years can lift the overall returns for investors from online ULIPs. The benefit illustration provided by Bajaj Allianz shows that the net yield of their online ULIP is 27 basis points higher (when gross return is assumed at 10 per cent).
However, one cannot overlook the role played by an agent in the ULIP buying process, says M. Arun, Relationship Manager, Pinc Money. An advisor will be able to guide the investor better on choice of the product and can also help the client through after-purchase formalities.