How to Buy a Term Life Insurance Policy

Buying a term life insurance policy based on an insurers claim settlement ratio (CSR) is a meaningless exercise. All it does is offer psychological comfort to the buyer who refuses to understand that each death, and therefore each claim settlement is unique. When a nominee applies for a claim, the insurers CSR is irrelevant.

That said, when a young earner wants to know, 'which policy should I  buy?'', or 'how to choose a term policy?', we typically say, 'choose an insurer you are comfortable with, just be honest while applying'.

Unfortunately, I find that this is not of much use, as the person still needs a simple way to define a comfort zone and short-list insurers inside the zone. The honesty part is of course always relevant!

Therefore, in this post, much as I do not like it, I would like to propose a simple way, based on the CSR, to short-list insurers for purchasing a term plan.

The whole process should take you no more than 15-30 minutes.

One good thing that has come out of the CSR hype is that the insurers (incl LIC) have also fallen for it! Some make it a point to flaunt their CSR. This might be a good development from the (future) customers point of view. If the CSR drops, insurers have begun to realise that it could impact image and therefore sales.

Deconstructing IRDA's Death Claim Settlement Table

First, let us touch upon aspects from IRDA's death claim settlement table, obscured by the claim settlement ratio.

Let me start with an analogy between an insurer and a teacher evaluating answer scripts. As the teacher starts evaluating scripts, he/she gets a sense of what the average mark of the class would be. When a student scores little or no marks in the first few questions, the teacher realizes that the total mark would be much lower the class average. Therefore, the tendency would be to be a bit generous in the next few questions so that the total is bolstered a bit.

On the other hand, if the first few questions are well written, the tendency would be to scrutinize, the whole paper(!) a bit closer. This is normal human tendency and even a teacher with no pressure from the administration is likely to do this.

Why won't an insurer who receives a big-ticket claim  scrutinize it tougher? After all, there is much more at stake.

The point is, LIC or private players, no one is likely to offer term cover claim settlement on a platter. Of course, there is a due process clearly mandated by IRDA.

The following is a screenshot from the  IRDA annual report 2010-11 (click to enlarge).

LIC-claim-settlement-2

Trouble is, what a claimant considers a delay and what is legally allowed, are two different durations!

There is a crude way to point out that higher the claim amount, higher the scrutiny, resulting possibly in a repudiation or delay.

The claim settlement table published by IRDA has the total benefit amount along with the number of claims intimated, pending and repudiated.

This is a screenshot from the individual death claims table of the 2012-13 annual report. The entries have been merged with the column headings to aid reading.

LIC-claim-settlement

The benefit amount per claim when compared over time can shed some light on the 'average' claim amount handled by the insurer. Of course, this ratio is not a sound way to make any solid inferences. Let us however run with it and see where it takes us. Before you pan me in the comments section, remember that I acknowledged this!

LIC-claim-settlement-3

The claim amount (Lakhs) intimated per policy was 0.73 was LIC in 2006-07 and 1.58 for privates.

In 2012-13, this increased by 36% for LIC and nearly 33% for privates. It must be kept in mind that the number of private players increased by about 50% in this period.

Thus, there is a significant increase in the claim amount per policy handled by LIC.

Even more  striking is the 78% increase in the benefit amount per repudiated claim (1.08 to 1.92) . How would you interpret that?

For the privates,  the benefit amount per repudiated claim  has increased by a whopping 95% (2.08 to 4.05) .

For LIC, the claim amount repudiated per claim can only increase from now (their e-term policy is only one reason). For the privates, I think it should come down in the future or at least not increase so dramatically.

One could argue that the new insurers would have processed early claims and hence would have scrutinized stringently. However, let us  read too much into this.

Simply because it is clear enough (even without this data) that the privates are likely to scrutinize claims tougher than LIC.

This can also be seen by

1) comparing benefit amount per claim paid with benefit amount per claim intimated. These are comparable for LIC. For the privates, the benefit amount per claim paid is always lower than the benefit amount per claim intimated.

2) Privates have more claims pending at the end of the year than the start of the year (not shown). The converse is observed for LIC.

The number of pending claims at the start of the year decreased from 9574 in 2006-07 claims to 8856 claims in 2012-13 for LIC. While it nearly doubled for the privates, primarily because the number of such life insurers have increased.

Notice that the  amount per claim pending at the start of the year has doubled for privates, from 2006-07 to 2012-13,  even though the denominator (number of claims) has nearly doubled (from 1894 to 3467 in 2012-13).

When the denominator doubles, the ratio can double only if the numerator (benefit amount) quadruples!

This implies that the privates are handling  much higher claim amounts than LIC (not much of a finding!). One could argue that this is the reason, their CSR is lower.

Even if you don't wish to make much of these ratios, I hope that you agree with my contention that if the claim amount is big (as in a term insurance policy), LIC too would scrutinise it carefully. Simply because such an amount would be higher the average claim amounts they process.

Claim settlement ratio

Claim settlement ratio ignores the

1) nature of the policy. LIC typically has a higher number of small ticket claims.
2) the time it takes to settle. It can take up to six months or even more to settle a claim. As long as a claim is settled within the FY, it will be counted for computing CSR. From a nominees point of view, that is a 'delay'.

Consider this:
In 2012-13
LIC settled 7.33 lakh claims out of 7.51 lakh claims. A claim settlement ratio of 97.7%
The privates settled 1.13 lakh claims out of 1.27 lakh claims. A claim settlement ratio of 88.6% (incidentally a significant improvement from 72.7% in 2006-07 despite a 50% increase in number of private pl.ayers)

Now, if the privates had a CSR equal to that of LIC, they should have settled 1.24 Lakh claims (instead of the actual 1.13 Lakh claims).
This is less than 10% off. This is approximately the difference between the CSR's, but when you look at it this way, I think it does not appear so bad!

If you are worried about this, then you should have enough money (including possible loading if any) to afford an LIC policy (offline or online).

If you don't, why bother?!

I suggest you pick a private life insurer who has been around for at least 10 years (with no plans to leave - check recent news reports) with a CSR close to, or above the total private average.

Even better, if the insurer has a CSR history consistently higher than the current private average.

It will take you less than 30 minutes to access the IRDA reports, locate the "Individual death claims" table and scan the necessary numbers.

Once you can short-list 2-3 insurers, compare the price for a policy (without loading, but inclusive of service tax) using the premium calculator available at their websites.

Choose the cheaper among the two.

Apply immediately. Do not ask anyone else for an opinion.

Calculating the insurance amount required

Should have appeared first in a 'how to' post!

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22 thoughts on “How to Buy a Term Life Insurance Policy

  1. Subramoney

    an honestly filled claim, with proper documents will always be settled in full without dispute. Hdfc, LiC and Icici use the same Re-Insurer - I think it is Swiss Re. So the answer will always be the same, and the time taken will always be the same. All term claims will be paid by the Re insurer so frankly it should not matter. LIC maybe getting a better discounting rate as compared to H and I because of volume.

    Reply
  2. Subramoney

    an honestly filled claim, with proper documents will always be settled in full without dispute. Hdfc, LiC and Icici use the same Re-Insurer - I think it is Swiss Re. So the answer will always be the same, and the time taken will always be the same. All term claims will be paid by the Re insurer so frankly it should not matter. LIC maybe getting a better discounting rate as compared to H and I because of volume.

    Reply
  3. Ram

    Hi Sir,

    This is not regarding any of the above insurance companies…but regarding PACL insurance ltd..

    I need more details on this..when I search for this on internet it is saying “its fraud”…Actually my uncle offered this to my parents and they have to pay 12500 per year till 2019 then they will get return about 1,15,000…is this trusted one? we have to pay second premium this month…please guide me on this whether to pay or not..

    Thanks,
    Ram.

    Reply
  4. Ram

    Hi Sir,

    This is not regarding any of the above insurance companies…but regarding PACL insurance ltd..

    I need more details on this..when I search for this on internet it is saying “its fraud”…Actually my uncle offered this to my parents and they have to pay 12500 per year till 2019 then they will get return about 1,15,000…is this trusted one? we have to pay second premium this month…please guide me on this whether to pay or not..

    Thanks,
    Ram.

    Reply
  5. Kanav Kalia

    Nice, would agree with the analysis. Another thing that probably can be added to this is - divide the total risk cover required into two parts and take LIC (preferrably e-term) and a private insurer policy. That ways the premium would be lesser than if you buy only LIC for the full cover and it gives you diversification (Which is always good!) What do you say?

    Reply
  6. Kanav Kalia

    Nice, would agree with the analysis. Another thing that probably can be added to this is - divide the total risk cover required into two parts and take LIC (preferrably e-term) and a private insurer policy. That ways the premium would be lesser than if you buy only LIC for the full cover and it gives you diversification (Which is always good!) What do you say?

    Reply

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