How to choose a term life insurance provider in 30 minutes!

Here is how one can choose a term life insurance provider in 30 minutes. Each passing day, more and more individuals are realizing the need for buying a term life insurance plan. However, too much time elapses between when they decide to buy and actually buy.

Many cannot choose. They require some kind of ratification from just about anyone that XYZ is a ‘good’ company to buy from.  Does not matter how ‘good’ is judged. Does not matter that unlike mutual fund or a stock, insurance is an individualistic solution.

Two people apply to the same insurer may have extremely different experiences, after which extrapolations are promptly made about whether a company is ‘good’ or ‘bad’.

Little or nothing is known about claim settlement experiences. So the claim settlement ratio (CSR) is given way too much importance, without understanding that each death and therefore, each claim is different. For example, the average number of times a flight reached a destination in time is of no relevance to the traveler taking that flight. His particular flight may reach sooner or later than usual because it depends on a specific set of circumstances.

So the ‘best’ answer to the question, “which is the best term insurance provider to choose?”, is

“choose an insurer you are comfortable with”.

Unfortunately, that answer is not good enough. Most people either do no know how to define ‘comfort’, or they simply won’t.

In a post titled, how to buy a term life insurance policy, I had discussed how

  • there is a significant increase in the claim amount per policy handled by LIC.
  • there is a 78% increase in the benefit amount per repudiated claim by LIC.

These imply that the claim settlement ratio for LIC can only go down in future.

In this, Subra(money.com) made an excellent observation in the comments section:

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.

So the conclusion is that ‘it does not matter where you buy, as long as you buy one fast’.

Again this does not help people who are indecisive. So in this post I would like to suggest a simple way to choose a term life insurance provider in 30 minutes.

Even for those who believe that CSR is important, that piece of information does not seem to help in selection. At least as of now, LIC has the highest CSR. So why not buy that immediately? Well, it is too expensive!

If a high CSR is what will make a person feel at ease, so be it. Let us ignore the flaws with CSR, the nature of percentages and comparing ratios made up of big numbers and small numbers (a point made by Subra).

Here are the steps to choose a life insurance provider.

  1. Type “IRDA annual report” in Google
  2. Select the latest annual report from IRDA’s website
  3. Open the pdf and search for “death claim”.
  4. Keep searching until you hit the table, “INDIVIDUAL DEATH CLAIMS FOR THE YEAR XXX-XX”
  5. In this table, look for the percentage in the “claims paid” column.
  6. Assuming LIC has the highest but is too expensive, scroll down and look for companies which have the highest number of claims at the start of the FY.
  7. Simple inspection for a few minutes would tell you that companies with the highest number of claims are typically the oldest and typically have good CSRs.

Total-claims-vs-Claim-settlement-ratio

For FY 2013-14, with the exception of Birla Sun Life and Reliance Life,  the other insurers who handled a large number of claims, typically settled more than 90% of them.

So in the above graph, excluding Birla SL and Reliance Life, you have 5 players to choose from.

  1. Now go anyone of the portals where you can Compare Term insurance policies without registering mobile number.
  2. Set a sum insured equal to about 15 times your current gross annual income. Do not buy a policy beyond 60 years of age! It would be too expensive and unnecessary. In fact, if you invest systematically, age 55 is enough.
  3. Compare the premium of the above 5 companies and choose the cheapest one (or two)

The above steps should take no more than 30 minutes when the next IRDA annual report comes out. Now that you have the above graph, it should take you much less than that if you need life cover right now!

The remaining steps are about how much sum insured the company is willing to offer you, how much you need, and how best to utilize what would be offered.

  1. These two companies may have a calculator in which you can determine the max sum insured they would offer you for your profile (salary, age, gender, habits etc.).  If they don’t have that information, call or write to those two companies with your basic details and find out the maximum sum insured that they are willing to offer.

 

  • Calculate the premium for that and check if you can afford that. Note that this is the premium before the company as determined the specific risk to them for you case. They may increase the premium depending on your medical tests.
  • You can also choose an insurer which insists on medical tests.
  • Now you have determined the max sum insured the companies of your choice would offer you, you need to find out, how that sum should be (or can be) used by your family in your absence.
  • Married folk with no kids can use this: Insurance Calculator for the Young
  • Married folk with kids can use this:  Comprehensive Child Planner
  • If the insurance amount you need is lower than the amount than the amount the insurer would offer, there is no problem.
  • If the insurance amount you need is higher than what the insurer would offer, you need to come up with a strategy as to how the sum would be used when the need arises.

 

For couples with no kids, the problem is simple: The corpus should be used to generate inflation-protected income

For couples with kids, in addition to the above requirement, part of the corpus should be invested for child’s education.  This planning can be done with the tool.

  1. You are now ready to apply for the policy. If after medical tests, the premium is loaded, you can ask the insurer to reduce the sum insured if necessary.  These 19 steps should take no more than 1 week or two weekends. Being honest while applying is key for your claim settlement.  CSR is not relevant for dishonest claims.

 

 

Couples who plan to have kids in future, can buy a policy now and increase cover later. Read more: Laddering Term Life Insurance Policies -Calculate and Customize

NB Choice becomes easier with bias. Personally, I have a deep sense of distrust when it comes to private players that life insurance or health insurance, choosing was pretty easy and pretty expensive!

NB Some people are not eligible for life insurance (or health insurance) cover due to their health, income or job profile. Not much can be done about this.

What do you think?

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