Should the lowest premium decide which life insurance cover you buy?

Financial planning is not complete without adequate life insurance, most of us would agree. And term insurance at that — particularly if you are earning and have dependents — for it is the most cost-effective option available in the market.

But even the cost of a term cover commensurate with your age and risk profile varies from company to company.

So, should you buy a cover from the company that charges you the least premium for the amount of cover you wish to take?

Experts suggest you look at a number of other factors and not the amount of premium alone.

The most important things to consider are the probability of the claim getting settled in the event of your death, and at the earliest, to avoid financial duress to the loved ones you leave behind. Imagine paying premium diligently for 20 years and then, after your death, the claim being disapproved for one reason or the other. You would also not like it if your family fails to get the sum assured say six months or even a year after your death, would you?.

These two considerations — assurance of the claim being settled and on time — are perhaps what have been driving people to prefer the Life Insurance Corporation (LIC) over the private players.

While such apprehensions may hold in a few cases, a generalisation would be far from accurate.

An analysis of the efficiency of claims settlement of various insurance companies based on the figures submitted by them to the Insurance Regulatory and Development Authority of India (Irda) should be in order.
For the sake of simplicity, we have selected six private life insurance companies and the LIC for comparison.

The private life insurers selected here charge the lowest premium for a term cover of Rs 1 crore, for a 30-year-old male, for 30 years. Note that the premium differs significantly across companies as the age and tenure changes. Hence, in case you want a cover for 20 years or for a lower value, it could just as well be that the cheapest cover is provided by some other insurance company.

Next, we compare their claim settlement ratio and turnaround time for settlement based on the data uploaded on their websites and submitted to Irda for the 2009-10 financial year. Turnaround time is the number of days it takes to settle a claim once all the documents have been submitted to the insurance company. For LIC, the latest such data available is for FY 2008-09, which has been taken.

Please also note that the claim settlement ratio and turnaround time for settlement mentioned in the table are cumulative for all the insurance plans offered by a company and not specific to term plans.

As can be seen, the claim settlement ratio of the cheapest term plan, offered by Aegon Religare, is a poor 48% and it also has the lowest turnaround of 46% within one month.
 

In comparison, LIC has the best claim settlement ratio of 95%, though its cost of cover is more than three times that of the other insurers.

ICICI Pru’s iProtect plan stands out as one of the cheapest term covers with a respectable settlement ratio of 90% and with 74% of the claims getting settled within one month.

Met Life’s Met Protect plan also compares favourably.

An analysis of the rejected claims reveals that most of them are for policies which are less than two years old. This may be a reason for the low claim settlement ratio of new companies such as Aegon Religare. Whether it improves in future will need watching.

To conclude then, even the private insurance companies have good claim settlement records, even when they are offering the cheapest term plan.
Such analysis should be done periodically to check the consistency and long-term trends before zeroing in on any plan.

Vishal Shah runs the blog http://bachhat.blogspot.com. Views are personal