New policies charge less premium, but there're many factors you need to consider before deciding to dump your old policy
Should I dump my old term insurance plan and buy a new, cheaper one? This is the question quite often being asked by yuppie insurance customers these days. Term insurance — pure life cover, in insurance parlance — is the choice of informed customers as it allows them to buy a large insurance cover for a small premium. And the good news is that the premiums have been falling over the past few years. Lately, the premiums have gone down further after many private life insurance companies introduced cheaper versions of term covers that can be bought online.
Now, coming back to the query, it is not rocket science to figure out that if you can save money on the premium, you should consider switching to the new plan. One can consider switching to a new term life insurance policy, as term life insurance policies do not offer any carry over benefit. For beginners, pure term life insurance policies pay the sum assured (or insurance cover) only on the policyholder's death. The policies don't have any investment component. That means, if the insurance buyer survives the term of the policy, he doesn't get anything. However, one has the option to add additional benefits such as accidental death and disability benefits and health riders with the basic term insurance policy.
WHAT DETERMINES PREMIUM RATE
Term life insurance premium depends on the mortality experienced by a life insurance company. As the mortality experience of the insurer improves over a long period of time, it is passed on to the customers in the form of lower life premium for the new customers.
For regular premium policies, the premium once fixed at the time of purchase of the policy remains the same throughout the premium paying term of the policy. If the insurance company experiences adverse mortality – that is more deaths than what it has assumed at the time of product filing – the company may choose to increase the premium for the new customers. In India, over a period of time, the mortality experience has been improving for the life insurance companies, which is getting reflected in the lower premiums for term life insurance covers.
FALL IN PREMIUM RATES
The new term life products filed by life insurance companies are available at lower rates for two reasons. As mentioned earlier, the improved mortality has helped the life insurance companies. The second reason is the improving efficiency over distribution – online distribution of such basic covers. When you buy a product online, you do not engage an agent, which leads to savings in distribution costs for the insurance company. The company passes this on to you in the form of lower premium.
On the online platform, for the younger individuals, especially those below 32 years of age, the savings in premium payable towards a term life insurance policy could be as high as 35% compared with the old term life insurance policies. With the rise in age, the savings, however, falls since there is limited scope for improvement in mortality.
SHOULD YOU SWITCH?
From the cost point of view, it makes sense to switch to a low premium product, given the possibility of savings on the premium payable.
You can either use the money saved to invest in your portfolio and earn some return or just spend that money the way you like. However, not all advocate dumping the old policies.
With the rising age, the premium also goes up, which may, in turn, nullify or reduce the savings on costs towards the premium. This is especially true if you are above 40 years of age since the premium rise is rather steep for that age bracket.
If your existing policy also has a health rider, such as critical illness benefit, attached to it, it is better to consider the change in premium for that benefit too. Given the limited experience on hand, the rider premiums have not materially changed yet. With rising age, the premium payable towards a critical illness rider will also go up. It is better to check the actual total premium payable on the existing as well as new products and calculate the savings, if any, before you decide to move on to a new product.
The second factor that acts as a hindrance is the state of health. If you are in good health and can go through the battery of medical tests, you may consider buying a new term life insurance policy. Since term life insurance policies are high risk business compared with the other investment oriented plans, underwriters are rather strict with the acceptance of risk. With rising age, the number of tests also goes up and if the buyer is not in good health he may be charged extra premium or in some cases even denied cover. The worst thing to happen is to let go an existing cover before the buyer gets a new policy in place.
THE WAY OUT
If you are sure that you don't want to continue with your existing policies, it is better to take a calculated decision. The first thing to do is to arrive at the amount of insurance you need. (See table) "First, buy a new term life insurance policy and let it run for some time, since the new policy may have some waiting period for certain benefits. For example, the critical illness benefit typically has a waiting period of three to six months. Also, life insurance policies do not cover suicide in one year from the date of issuance of the policy.
It makes sense to run the existing policies till the time the new policy is two years old. This is primarily due to Section 45 of Insurance Act, which deals with 'indisputability of a claim'. A claim under a policy that has completed two years cannot be contested on the grounds of suppression of material facts.
But it may not be entirely true. Insurance company can still contest the claim but the onus of proving a fraud is entirely on the insurance company after the policy completes two years.
The decision of paying the claim rests entirely on the full disclosure of facts in good faith. There are many cases that have been decided by various competent courts in both the insurer and insured's favour. Section 45 is meant to limit disputes in insurance business. If you act in good faith and disclose all material facts known to you, the insurance company will pay the claim. Better buy adequate term life insurance for peace of mind and secure future of your family.
