Taking a large term cover? Be extra careful

The privatisation of the life insurance industry in 2000 led to pure term insurance policies becoming available for the first time. They are still not popular as at least two generations of Indians have grown up with the notion that life insurance without returns (no matter how poor the return) is not good.

However, one of the fallouts of the recent media attention on differential commissions on insurance products and mutual fund products is that focus has shifted towards term insurance covers as an economical mode to provide adequate life insurance.

As a result, increasing number of Indians have started taking term insurance. This trend has caught on from the last one year with around 50% fall in term insurance prices and easy availability of term insurance policies online.

The consumers who are buying term policies (online or offline) are financially more literate and tend to cover their lives for significantly higher values than those who buy investment-oriented plans. An increasing number of consumers are also concerned about whether their families will get the claim in the event of their death.

This concern increases manifold when they see the difference in price offered by the private insurance companies vis-à-vis LIC’s premium for similar policies. (For example, a 35-year-old non-smoker male will have to pay a premium of around Rs15,000 for a Rs1 crore policy for 25 years from private companies versus Rs40,000 for a similar policy from LIC.  Some consumers are very concerned about such a sharp difference in the price for a similar product and wonder if there is a catch somewhere.

Some customers are smart enough to find out the death claim rejection ratios (called death claim repudiation ratio in insurance parlance) that the Insurance Regulatory and Development Authority (Irda) provides on a yearly basis (latest data available is for year ended March 2010). This presents a starkly different picture of LIC compared to private life insurance companies. LIC rejected death claims for 1.21% of the death claims versus 7.60 % for the private insurance companies as a whole (though the figures vary widely from a low of 3.27% to a high of 44% for different private companies).

What do these figures mean and how do these affect your decision to choose a particular life insurance provider?
One cannot deny the importance of this data, which clearly points towards LIC’s death claim settlement procedure being good. But like all averages, this statistic has something more to look into to put the data in perspective. Irrespective of which insurance company you choose, if a death claim is made within the first two years, it will be thoroughly investigated (unless it is from a well reported accident such as an air or rail crash).

If the insurance company finds that any material facts were not disclosed (such as any diseases or existence of other insurance policies, earlier rejection of an insurance proposal by another insurance company, etc.) the death claim is likely to be rejected.
Conversely, if all material facts have been fully disclosed then no insurance company can deny the death claim.

To that much extent, the death claim settlement percentage is not relevant for a consumer as long as all material facts have been fully disclosed by him. For example, a consumer suffering from marginally high fasting sugar should fully disclose this fact including the medication that he is taking. This may result in his having to pay additional premium but it will ensure the settlement of the death claim, should the need arise.

In fact, if he does not disclose this, his chance of the death claim being denied is high (more so if the death claim is within the first few years). This is irrespective of the fact that average death claim denial percentage of the insurance company concerned is otherwise quite low.

The other point consumers are concerned about is that a term life cover is a long-term contract and for a large value. They are concerned whether the life insurance company will be around to pay the death claim decades later?  Of course, this is a very legitimate concern.

All insurance companies are governed by Irda, which has fairly strict guidelines on minimum solvency ratios (minimum capital available to meet possible liabilities). So, logically all of them should be judged based on their solvency ratios. However, LIC enjoys a government guarantee on the sum assured so it has a clear advantage on this score.

LIC has an advantage over its private sector counterparts except for the fact that its premium for term policies is about 2.5 times the cheapest available premium. In my book, the advantage is not enough to justify the high premium charged.

For my own term life insurance policy, I have chosen a specific private sector company since I have fully disclosed all relevant facts in my insurance proposal.

You should take your own decision on which company you prefer for term plan based on your perceptions of the trade-off between higher premium and the safety of a government guarantee.

Disclosure: Neither I nor the company I work for is an insurance agent or insurance broker. However, LIC as well as most of the other private sector life insurance companies are advertisers with Apnapaisa.

Harsh Roongta is CEO,Apna Paisa, a price & features comparison engine for loans, insurance and investments. He can be reached at hrdna@apnapaisa.com.