Once upon a time, I used to despair that the mass of Indian savers would never come upon the realisation that term insurance was the only kind of insurance product they needed. However, those days are past. Selecting the right type of life insurance product has now become a cakewalk - you simply need to buy a term plan. Unlike other hybrids such as ULIPs and endowment plans, pure term plans are quite affordable and in essence, a true insurance product.
However, it is not easy to choose a term policy from the available options. Different companies make different claims on the superiority of their term insurance plans. While some claim that their term insurance provides a high amount of life cover at a negligible cost, others brag about waiving off the premiums in the case of a disability or the diagnosis of a serious illness. So, which one is the most trustworthy to take care of your loved ones if you are not around?
To help the choice, let me discuss the Claim Settlement Ratio - an important aspect to consider when it comes to selecting a term plan. Put simply, claims settlement ratio denotes the number of instances in which the insurance company has paid the sum assured out of the total number of such requests received by it on the death of the insured. If an insurance company has a claim settlement ratio of 95 per cent, it means that out of the 100 claims filed, the insurance company has honoured 95 and rejected five.
Consider it as a metric that tells you the probability of the insurance company paying up the promised sum to your dependants. Therefore, it lays bare the truth about an insurance company's claim for protecting your family by providing the much needed financial support at a time when they would probably need it the most.
Doesn't Value Research always say that while choosing mutual funds, always look at their past records and go with the ones that have performed well consistently over the years? Well, in the case of a term insurance policy, the claim ratio tells the same thing. Therefore, we must not ignore the claims ratio or settle for a lower one while choosing a term plan. Remember, the higher the claim settlement ratio, the better it is.
You can find the claim settlement ratios on the websites of life insurance companies under the 'public disclosures' section. You can also find them in the annual report of the regulatory body - Insurance Regulatory and Development Authority of India (IRDAI). The following table provides the latest claim settlement ratios of the prominent life insurance companies, as published on their websites.
FY19 Claim Settlement Ratio (%)
|Individual death claims|
|Tata AIA Life Insurance||99.07|
|HDFC Life Insurance||99.03|
|ICICI Prudential Life||98.60|
|LIC of India||98.04*|
|Reliance Nippon Life||97.71|
|Aditya Birla Sun Life||97.15|
|*Figure for FY 2018
Source: IRDA and respective insurance company websites
However, one should note that the number of rejected claims also includes the ones which the insurance company has refused to pay on account of fraud.
While the claim settlement ratio is important, it is not the only criterion that should be considered while choosing a term plan. You must also look at the exclusions clause where an insurance company explicitly lists down the situations that are not covered by them. For example, an insurance policy may or may not cover death due to any adventure activity. Often, these details are mentioned in the long and boring fine print and therefore, hard to read.
However, it is absolutely worthwhile to spend time and sift through the details to fully understand and compare the circumstances under which your claim will not be honoured. Needless to say, you should prefer the one that puts minimum exclusion covenants.
When you are going through the features and the fine print, make it a point to also understand what benefits or riders are available in case of a permanent disability to the insured. A term policy is meant to cover the financial risk due to the demise of the bread-winner, but what about a case where he is still alive but gets permanently incapacitated to earn?
Finally, the cost matters as well. Compare the premiums. For a 35-year healthy male, the annual premium for a one-crore cover with a policy term of 25 years can widely vary between Rs 9,000 and Rs 13,000. That's a variation of more than 40 per cent. The internet has made our life quite comfortable. Price and benefits of various plans now can be explored at the click of a button.
Once you've made up your mind to buy a plan, remember that doing so online directly through the website of the insurance company is much more cost effective. The company saves on the cost of the agent's commission, and passes on a part of it to you by way of lower premiums. Do check out the premiums of offline and online plans to see how much you save by buying directly from the insurance company.
Of course, some more caution is needed. You must ensure that you provide all details accurately about any existing medical conditions, your lifestyle etc. For instance, hiding your smoking habit from the insurer may help you save on the premium but can put the financial future of your loved ones at risk, should the need arise. Remember, a high claims ratio isn't going to help your cause if your disclosures are later found to be incomplete or worst, wrong. Paying a bit more premium is far better than risking a claim rejection later.