Is it worth paying extra premium for term insurance?

With various regulations in place for insurers by IRDA; there are not many advantages of paying a premium to larger, and otherwise reputed, companies for their term insurance cover.

Intro 💫

When buying a term cover, anyone would want to do their best to ensure their nominee(s) can claim the cover amount in their absence, if the worst were to happen. But it's easy to let our emotion guide us, what should be a rational process.

With various restrictions in place by IRDA (Insurance Regulatory and Development Authority), there aren't that many advantages of paying a premium to large reputed companies for their insurance cover.

Let's analyze various concerns you might be having, and how those stake up.

Concerns & Related Regulations 🤷

Insurance companies will find a way to enforce exclusions

Do investigate under which all circumstances they could reject a claim. It can be done by reading policy terms & conditions carefully, or getting details in writing from insurer.

But unlike health insurance, term insurance is much simpler. As morbid as this sounds, this question has a binary response.

Either insured person is dead or they're not dead. Even suicide is covered after 1-3 year of policy depending on the policy, which essentially means after a certain point of time insurer cannot reject a claim holding insured person responsible for their death.

Small companies will reject my claim no matter what

This is not true. According to Insurance Laws (Amendment) Act 2015 Section 45 ()

No policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of the policy, i.e., from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later

This means, after 3 years of continued payment of premiums, even if they find that some information about your medical history isn't correct in the insurance forms you had submitted, they can’t reject the claim on grounds of non-disclosure.

So, ensure that you provide correct information to the best of your knowledge when you take a life insurance.

But no need to worry about claims getting rejected because you missed to cross a ‘t’ in your form; if you've paid insurer premiums for at least 3 years.

They will make us wait a long time to settle

They cannot!

As per the regulation 14 (2i) of the IRDAI Policy holder’s Interest Regulations 2017, companies need to settle the claims within 30 days of receipt of the documents. If they require further investigation, they need to do it in 90 days.

Maximum time period one's family needs to wait, is 90 + 30 = 120 days.

Insurance broking companies like Policybazar, Coverfox etc. have representatives in major cities who will be able to do the documentation on our behalf in case of any claim.

They will be able to guide us in getting the needed documentation thus decreasing the chances of delay.

What if the insurance company gets closed?

Sections 35, 36 and 37 of the Insurance Act provide guidelines of amalgamations and transfers of insurance business.

As per this, an insurance company just cannot exit the business.

It can only merge with other companies and that too with certain conditions, thus protecting our insurance cover.

They're also required to maintain the solvency ratio of 1.5 which means if the company gives 100 Rs cover, they need to keep aside 150 Rs (see note), thus ensuring that the company will be reasonably able to provide the insurance money.

Note:

• Solvency ratios in insurers is (Net Income + depreciation) / Liabilities. So example is not 100% accurate, but an approximate.

• You can check the history of Aegon Life & IndiaFirst insurance on how the partners exited the business, merged with others etc. due to business and regulatory reasons; without affecting policy terms and conditions with insured persons.

Higher Claim Settlement Ratio

CSR (Claim Settlement Ratio) is number of insurance claims settled, as a percentage of claims received by the insurer. It's a metric every insurer has to publish with the regulator.

While this is an important number to look at; some of us really overdo it, extrapolating to imaginations that aren't apparent from the raw data itself.

To begin with, if an insurer has a CSR of 96%, then it does NOT mean that your claim has a probability of 96%, of getting approved. Your case, if it ever comes to that, would be treated by claims department of insurer, as a standalone case of its own.

CSR is a lagging indicator, i.e., it only says what has happened; not what would happen in future.

What you should be more interested in, is the potential future value of your insurer's CSR, around the time of insurer's demise. Since there's no way to predict that (can you really predict what would be CSR of Max Bupa in another 10 years, looking at its CSR of past 5 years?), it's almost pointless to look at CSR as a guiding north star.

A relatively new entrant in insurance market, would've a younger insurance user base; and therefore lower CSR due to higher chances of rejection.

CSR can be sensibly used as a baseline selection criteria. For example, one might not consider insurers that have not scored more than 90% on their CSR in last 5 years.

But it's naive to think that if CSR of insurance company A is 98%, while it's 95% for B; therefore your family might've 3% extra probability of getting your claim approved if you were to get it from insurer A.

Chances are, if B has a good reason to reject a claim, most likely so would A.

Conclusions 🎏

These arguments are based on the rules as of today and is subject to change it future.

But historically, the rules have only gotten stricter, and not the other way around.

So, it is safe to assume that there is no real advantage of going with the company with good names. What you may consider is the solvency ratio and the customer service

You may also avail policy under MWP Act if you are married and got loans and other liabilities to ensure that the insurance money is passed on to your wife. You may find it easier to get this option if you go with online insurance brokers

Taking rides like accidental death might not be a good idea since it is hard to prove.

But some rides like critical illness got its own use case since the policy premium increases as you age if you take it separately.

You should assess your own situation and take a call on riders, since it is beneficial to have separate insurances instead of add-ons and keep the life insurance in its vanilla form.