Online life insurance: When the cheapest deal is not the best

"Insurance is never bought – it is always sold!" – this is the oft repeated refrain in the life insurance industry. This is slowly changing as a new breed of consumers are flocking in droves to the online comparison portals and also to the online term insurance websites of the insurance companies. They are now financially literate thanks to the power of internet and the media that keep highlighting the need for risk based term insurance and the need to keep insurance needs separate from investment needs.

The prices of online term insurance have fallen by around 40-50% spurred by increasing demand from consumers and increasing competition among the insurance comapnies. The term insurance policies are similar despite the attempts at creating features such as deferment of policy proceeds (periodic payments instead of lump sum payment) or some riders that provide for additional covers on payments of additional premiums. This has given rise to a new dilemma. Should you just buy the cheapest term insurance policy available? There has been some debate that consumers should buy term insurance policies from the provider whose claim rejection ratio is the lowest. But in recent times almost every large and established insurer has a comparable claim rejection ratio. Besides, with the new amendment of the Insurance Act, life insurance companies cannot reject your claim at all after 3 years on any grounds. And if you are making a full and complete disclosure in your proposal form, there is no way the claim can be rejected in future even for early claims (industry speak for death claims within 3 years). So, a low claim rejection ratio as a parameter for choosing your service provider is no longer very relevant.

One thing the consumers must bear in mind is the possibility of the policy being actually issued or the possibility of being charged a higher premium. Some insurance companies have dropped their premiums very low but now have very tough norms for those who will be eligible for these low premiums. In most cases, the consumer would actually end up paying higher than the standard premium so the lower published premiums are just illusory. The situation is complicated by the fact that this practise is not restricted to only those companies that have the lowest premium. In fact, downright rejection of the proposals have also become common and this will only be compounded further as insurance companies have become super careful in issuing life insurance policies because of the recent amendments that disallow rejection of claims on any grounds after 3 years of policy issuance.

Consumers who have been bought up on a diet of pushy life insurance agents who escort them for the medical tests and co-ordinate the policy issuance are bewildered by this development where they are tersely informed about rejection of their proposals or get angry when they are asked to pay huge additional premiums if they want their policy to be issued. The consumer is in a cleft stick. If he rejects the suggestion to pay additional premium, he will have to go through the whole proposal, medical examination rigramole again and worse even have to now disclose the fact that his proposal was rejected/rated up in the past. Some get so put off that they swear off term insurance itself and some will blame their investment adviser who advised this policy despite knowing fully well that the investment adviser has no role in the issuance of the policy or getting any benefit from the issuance of the policy. This problem is even more acute in the critical illness policies where outright rejections are rife and where it is even more of a challenge to motivate the consumer to persist with the process of getting this policy.

Unfortunately, no data is available on the proposal rejection percentages or the percentage of proposals in which a particular insurance company has proposed an increase in premium over and above the normal premium.

Given the need to popularise pure risk policies this kind of aggregate data should be collected and disseminated by Insurance Regulatory and Development Authority so that consumers can make an objective decision on their insurance provider.

Till such data is available from the regulator, the consumer will have to depend on anecdotal data that he can glean from his investment adviser or the social media. Another possible clue can be gleaned from the subtle push provided by the online web aggregators as they make money on actual issuance of the policy and they will work harder for a company that is actually interested in issuing policies.

So, to summarise the cheapest term insurance policy is not necessarily available for you so follow the clues given above to get the policy for you. Whatever you do please do not give up on getting the policy.

The writer is a chartered accountant and a Sebi registered investment adviser