Look at life insurance as a pure risk cover

A term life cover is a pure risk policy. But as people ask for maturity benefits, insurers add an investment component to the policy, says KS Gopalakrishnan, MD & CEO, AEGON Religare Life Insurance. He has pioneered the concept of online life insurance and united-linked products with an investment guarantee in India. He is also a member of the Institute of Actuaries of India.

Edited excerpts from an interview:

Why do you mix insurance and investment?

Historically, that has always been the case, and not just in India. So, for example, you may be having a vehicle − a car or a scooter. When you insure your vehicle, you don’t ask what you get on maturity.

But if I try to sell life insurance to you, your first question will be on what you can get at the end of the policy term.

People don’t think they will die. The thought process is that something bad happens only to others − that’s how people view life.

So when people ask what they get on maturity, company A declares it will give back premiums on maturity, Company B says it will give pack premiums plus an ‘X’ per cent return on it. Company C will add a bonus.

Then there will be a company D, which says it is providing transparency and the return will be market-linked.

This is how products evolve and suddenly one day, when markets fall, people lose money and they again start looking for guaranteed products.

Suppose an individual is having a life cover which he took say 5 years ago through an agent. Now he wants to discontinue it and take a policy online. Will he lose or gain?

It is possible that customer will gain as online tem products are priced significantly lower than offline term plans. But there are several factors that come into play. For instance, there may be some instances of an increase in the premium rates linked to age that may nullify or negate any such gains.

Also, if the health condition or other risk parameters have changed adversely, the customer could be charged an extra premium or his insurance cover could even be declined.

How does one make a choice between a term cover and whole life cover?

A pure term life cover only has a death benefit. That means that you do not get any money back if you survive the duration of the policy. Hence, term life products are meant not for the life insured, but for their family or dependents.

In comparison, a whole life cover has a death benefit, as well a ‘cash value’ in the policy on surrender of the policy.

However the cost of a whole life policy is much higher by comparison.

When insurers offer guaranteed return products, is there a cost attached to it?

Yes, there is a cost to the guarantee. This cost varies with the type and quantum of guarantee. Insurers deliver the guarantee by using different types of investment strategies, including hedging.

How do online term covers manage to charge a lower premium?

The reason that online terms covers charge a lower premium are manifold.

One, the online customer profile assumes better mortality. Their lifestyle and age group gets them a better pricing. Then, of course, the cost of intermediation is removed in the case of online term policies.

There is also a lot of increase in process efficiency and reduction in processing costs that impact pricing.

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