Term Insurance

Thumb Rule

The Insurance and Investment should be kept separate.

The Term Insurance falls in line with this rule.

Analysis

1. Claim Settlement Ratio (CSR), published by IRDA and highlighted by insurers for selling insurance, should be used as just one of the factors while converging on a Term policy.

2. In fact, IRDA does not even differentiate between CSRs of pure-term life insurance and investment-oriented life insurance policies.

3. CSR is just a simple statistical ratio of settled claims and does not represent the probability of claim acceptance in future.

4. It also doesn't provide info on:-

a) types of policies covered

b) breakup of sum insured

c) reasons for rejected claims

d) cause of the deaths claimed

e) right and wrong rejection.

5. As the burden of proving fraud lies with the insurer, and also if there is a delay in claims by the nominee, CSR will get affected too.

6. As CSR is a sum total ratio, if two insurers merge in future, CSR could also change drastically which a new customer can't decipher.

7. If CSR would be so sacrosanct, only LIC policies would sell, although it has actually rejected far more claims (in numbers).

8. On the other hand, several private insurers have made significant headway in selling policies, notwithstanding their lower CSRs, and subsequent years would gradually increase their CSRs too.

9. At best, CSR should be used to weed out the worst, within a common span of operations, instead of selecting the best.

10. Although choice of selecting an insurer is personal, with time the "CSR short-cut" method should eventually give way to more logical hands-on selection, by believing in truthful declaration at the outset itself, from various insurers.

11. It is also important to know that in the first 2 years, an insurer is allowed to deny a claim if the cause of death is suicide, or there was “misrepresentation” while applying.

12. Due to this, insurers with older customer base are likely to have higher CSR than newer companies.

13. One can't totally deny that private insurers litigate more before settlement, but that shouldn't be the sole criteria of selection if your application is totally honest and truthful, as their lower premiums cannot be ignored.

14. However, if an insurer can establish a fraud within 3 years, then it can cancel the policy, deny a death claim and even refund of premium.

15. If misrepresentation or suppression of facts (not amounting to a fraud) is detected, the premiums may get returned without death claim payment.

16. As frauds committed by customers cannot be blamed on insurers, chasing and denying such claims is in the interest of good customers, even if it is at the cost of CSR going down.

17. Always prefer buying a term policy online, as it is in your interest (not the agent’s) to ensure that you fill every detail in the application form yourself only without any margin of error.

18. Also, you must declare everything and answer every question honestly to the medical examiner, even pointing out anything that is missing, and ensure it is noted, as it could be a reason for claim rejection later when you are not around any more.

Tips

1. Term insurance is meant to provide your dependents with enough money to replace your income in case of death, for them to take care of:-

a) Basic family expenditure,

b) Major expenses like education and marriage of children, and

c) Other liabilities like outstanding loans.

2. Your term plan's tenure should always cover the age till you aim to work, even considered as 65-70 years by insurers for offering policies.

3. Thumb rule for deciding your term plan compensation should be:- Outstanding loans plus 8-10 times your current annual income (or 20-25 times current annual expenses), as it presumes that your dependents would be able to fulfill the unfinished goals with it.

4. It is, therefore, logical that this amount should also increase along with your loans, income and inflation-driven expenses as well.

5. However, if you aim to increase this compensation by calculating it after periodic gaps, you may run the risk of paying higher premiums as well as outright refusal of new policies after some time, due to various reasons like increasing age, health deterioration, etc.

6. Hence the need to buy term plans at a healthier younger age, say 25-35 years, for longest possible tenure, say 65-70 years age, for suitable compensation, calculated / estimated in advance, and as consented by the insurer.

7. If you are a regular long-term SIP investor in growth-oriented mutual funds, instead of buying one omnibus term policy, it is beneficial to take smaller plans of varying terms simultaneously, even from different insurers after declaring them to all, because:

a) Premium rates on term plans go up as the tenure increases,

b) Premium outgo can be reduced, by splitting the total cover across various tenures, without compromising on its extent,

c) Splitting your cover, say of 1 crore taken at the age of 30, into 4 smaller plans of 25 lakh each, with 4 different maturities of 10-40 years, reduces premium costs substantially,

8. As your insurance needs taper off with age (due to investment corpus and asset build-up, loan repayments, working and settled children, etc.), you can keep reducing your total cover by terminating the policies one by one.

9. In this way, you can ensure that as your insurance needs come down with age, so does your premium costs, leaving more savings in your hand to invest for your own retirement corpus, as all term policies get elapsed without any benefits upon survival.

10. To solve specific problems of insufficient term cover due to inflation or increase in income, some insurers also offer plans where cover increases

every year by 5-10%, or is indexed to inflation, automatically increasing the sum assured in future years.

11. If you must go for such plans, opt for either a 10% annual increase or an index-linked one, although some plans allow you to increase sum assured at certain lifestages like marriage or new home or childbirth.

12. However, your revised cover cannot be more than 3 times original sum assured, and premium of such plans is higher than an ordinary plan.

13. Similarly, there are plans where the cover keeps reducing as you repay big-ticket credits such as house loans.

14. All said, it is best to go for simple term plans as per your needs than for complex offerings, where you can configure the tenures by opting for several term plans in a way that they match your financial goals, and whenever a goal is achieved, the corresponding term plan terminates.