Buying a term plan? Go by hard numbers while selecting a life insurer

Avoid insurers with large difference in claims settled by number of policies and by benefit amount

Zeroing in on the right insurer when buying a term policy is not easy. A lot of hard-selling occurs. Agents highlight a variety of policy features that leave the buyer confused. However, the key quality that one looks for in a term policy is that it will pay out the claim when it arises, and do so without delay. By using a few performance-related metrics, which you can obtain from the Insurance and Regulatory Development Authority of India’s (Irdai’s) recently published annual report for 2020-21, you can quickly narrow down on the best insurers.      

Size

The annual report contains figures on premium underwritten by life insurers in 2020-21 (statement three, page 131). “The size of premium collected demonstrates the company’s popularity and the trust it enjoys among customers. It is better to go with a company that has a large reach and customer base,” says Naval Goel, founder and chief executive officer, PolicyX.com. The claim on a term policy could be made 30-40 years later, so going with a larger brand is a safer bet.

Solvency ratio

The annual report also provides the solvency ratios of life insurers (statement 16, page 149). “This figure indicates the strength of an insurer’s cash flows and its ability to meet its long- and short-term financial liabilities. This parameter should definitely be considered when selecting an insurer,” says Goel. It will help you weed out the weaker players.  

Claim settlement ratio

This is a key metric when purchasing term insurance (statement 7, page 135-136). “A high claim settlement ratio gives buyers the confidence that the company doesn’t reject a lot of claims or keep them pending,” says Arnav Pandya, founder, Moneyeduschool.

This ratio is available by number of policies and by benefit amount. Some insurers may have a high claim settlement ratio by number of policies but a lower figure for benefit amount.

“When there is a large gap between these two figures, it indicates the company rejects a lot of the higher-value claims,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

Usually, payouts on term policies tend to be bigger than on traditional plans.

Compare claim settlement ratios between insurers of a similar size. A small-sized insurer that pays out a limited number of claims annually will find it easier to notch up a higher claim settlement ratio.

“The claim settlement ratio becomes truly reflective of a company’s performance when the number of claims being made becomes large,” says Raghaw.

Duration-wise breakup of pending claims

Data on aging of pending claims is also available. If a high percentage of claims are pending for a longer duration, that is problematic. It shows the company takes a lot of time in settling the claims that it holds up. The nominee may have to run from pillar to post to submit additional documents or meet other requirements.

Remember that in case of policies that are more than three years old, insurers can’t deny claims by saying the insured lied or provided false information at the time of purchase.

A delay also results in monetary loss for the nominee. If the claim on a high-value policy of, say, Rs 5 crore, is settled in six months instead of one, even factoring in just a 4 per cent interest from a savings bank account, the nominee loses out on a considerable sum.

Thereafter, you may compare premiums and also see whose policy offers features that meet your requirements. Finally, ask existing customers or a broker about the insurer’s service quality before making the final choice.