Did you know that the cost of taking a term insurance policy has crashed in recent times after many insurers allowed you to buy them online? When other financial services are doing well in the virtual space, insurance buyers are yet to benefit from this on a large scale. However, premium for term insurance policies in the online mode can be 40-50 per cent cheaper than the offline one (buying through agent /broker). However, only a handful of companies currently offer online policies.

For individual buyers, online purchase of term policies has three advantages – value, convenience and access. From a value perspective, there is no reason why such a huge premium difference should exist between online and offline options.

Except the first year where the agent/broker actually advises you on how much insurance he may require, there is no major ‘after-sales' support an individual requires (barring collection of premium) for a term insurance plan from the second year onwards.

For the insurance company, service levels for both online and offline policy buyers are not all that different. That makes it difficult to explain why insurance companies need to collect a 40-50 per cent higher premium for offline policies sold through agents.

Let's look at what factors usually go into the setting of premium charges for you as a policyholder.

The premium price factor

The premium for an insurance policy is usually an amalgam of various charges put together depending on the age, type of the policy and the claim experience of the insurance company itself.

Some of the major factors that are considered while fixing your premium are the general mortality rates prevailing in the country and in that population segment, the insurer's solvency margin and other operational expenses. The agent's commission often makes up a big component in a policy .

Mortality charges

Every insurer pools a certain portion of the premium collected from all policyholders that goes to the policy holder's nominees in the event of the death. For arriving at this ‘mortality charge', the age of the person insured plays a major part.

If the person is young, the premium will be lower due to higher life expectancy. Health record too plays a role. If the individual's family medical history is good and if the policy holder is a non-smoker and doesn't consume tobacco, premiums will be far lower than for others. Consider this.

If a male of aged 35 years buys a term insurance policy for Rs 50 lakh for a term of 25 years, his premium outgo per year will be just Rs 9,899 compared to Rs 13,373 for a person with the same profile who consumes tobacco. Other factors that may have a bearing on premium are the nature of occupation (if hazardous).

Solvency Margin

Solvency margin is the amount by which the assets of an insurer exceed liabilities and will form part of the insurer's shareholder funds.

Methods of valuation of assets and liabilities of an insurer are prescribed by the regulator.

Insurance regulations stipulate a minimum solvency margin, which an insurer must maintain at all times. The solvency margin requirement does not change no matter how a policy is bought and hence does not warrant any separate premium.

Operational expenses

The largest and foremost expense of an insurer is the agent commission paid to the individual or firm selling you the policy, when you buy it through a distributor. For term insurance policies companies pay roughly 20-25 per cent of the first year's premium as commission to the agent and from the second year onwards this drops to 4-5 per cent, running throughout the policy term. Other expenses such as administration and investment related costs are likely to be the same for online and offline purchases.

Consider this. If you buy a Rs 50 lakh term policy through an agent, you end up paying about Rs 15,277 per annum as premium (against Rs 7,500 for a similar online policy). In the first year, assuming 20 per cent is paid as agent's commission, the outgo for the insurance company on this count is Rs 3,055. Even assuming a policy holder buys a policy through an agent, the additional cost of procuring the policy should only be loaded on to the first year's premium. There appears to be no justification for charging 40-50 per cent higher premium from the second year onwards.

All this is a pointer to insurance companies that the current premium rates on term policies bought through agents, should be reduced to more realistic and affordable levels.

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