Some FAQs on Life Insurance

Commonly asked queries on term / life insurance

Q1. What happens if the company I have bought insurance from goes bust? Is there any mechanism to protect customers like Deposit insurance corporation?

A1. The IRDA regulations mandate that the solvency ratio (mainly indicates the assets versus liability adequacy) of the insurance company should have a decent margin of safety. Check this Link for more details. Currently, all the companies have decent solvency ratios. Hence, we do not need Deposit Insurance corp or any other such fallback for that.

Q2. How do insurance companies use funds to pay? Is it 'pay as you go' OR 'is it that they invest the money and pay accordingly when the claim arises'?

A2. In short, the latter. In the longer form the basic idea is that the mortality actuarial rates of the life insurance premium is calculated in such a way that probability wise, insurers make money on those. Eg, for a person of age of 30, the old mortality rate (used by LIC) was 1% (example) then they would price it as 2%. On a probability play, they are betting that if 100 persons aged 30 take Re 1 insurance per person, then only 1 of them dies (on an average because the mortality rate is 1%). They would then have to pay Re 1 to the dead person's family and keep the rest (Re 1) as profit. for regular term insurance, the company sets up a way to invest partially the extra premium (1% from the total 2% of the above example) and uses it to compensate in the later years. for single payment term insurance, the above is done in a much bigger way. for ulips / endowment policies, whether they are transparent or opaque, the mortality premia are deducted from the total amount regularly and work in a similar way as the first example.

Q3. Can I have 2 insurance plans at the same time?

A3. Yes. But you will have to declare that in any subsequent plan, if you already have any. The company considers if the total cover is within its risk profile or not. Eg, you can have 1 crore cover. You can take 1 policy. But if you already have a 50L policy, company will say, sorry boss, we don't feel comfortable providing you an additional 1 crore plan. If you are ok with 50L, we can do so.

Q4. Should I have 2 insurance plans of half the cover each, instead of 1 single large plan? This will diversify the risk of claim rejection. This is a little difficult question. It is probably a simpler idea to have only one large term insurance plan because it is much easier for the family to get claim later on. If the company creates any issue, then the insurance ombudsman is the way to go. An alternative is if you already have some other small policy, continue that policy and use that as the diversification tool. The rule is that if one company pays up ANY policy in case of demise of the policy-holder, no other company can reject the claim (citation needed).

Q5. What about the Claim Settlement Ratio?

A5. I will first put up this link = http://www.subramoney.com/2012/03/insurance-claims-settlement/

The basic idea is that the CSR ratios touted on the IRDA sites (and the individual companies' sites) are so opaque that you cannot differentiate between data of term insurance versus non-term plans (way too large in numbers), actual claims due to death versus maturity of plan, early (<2 year) claims versus late claims, etc. Also, consider the fact that how can one apply the CSR data of 2011-12 to a plan which has been introduced subsequently (most of the online term insurance plans have come later). In short, it is a completely useless statistic. Just another point to be considered, why is the CSR of LIC not 100% ?

EDIT:(2 more)

Q6. Why is there a big difference between Smoker and Non-smoker premium in many Term Plans?

A6. The difference is because some companies have differentiated the mortality rates of smokers and non-smokers and use different rates for them. In general, the chances of dying for someone smoking is more than someone who isn't. So, those companies have different options to pass that benefit to the consumers. Many others have decided not to differentiate between the two categories. If you will look more, you will see that even men and women have different rates.

How to use this? If you are smoker, it would be preferable for you to use a company which does not differentiate between the two, so that there is no issue of this point. While who are complete non-smoker, prefer a company which gives you the benefit of being a non-smoker.

Q7. Should I go with online or offline plan?

A7. In the offline plan, the agent is in between you and the company and helps you to fill the form (rightly or in a few cases wrongly) and he does take a commission out of the total premium. The main point remains in case of claim, to use the services of the agent, (a) you would need to stay in the same place, (b) the agent has to stay in the same place and (c) remain with the same company and (d) he needs to really help your family in that case. All 4 conditions have to be met and the chances of that happening decrease with passage of time (who knows about 10 years down the line). While the alternate which is always available is to go directly to the insurance company's office, fill the claim form, put the appropriate supporting documents and get the claim. So, understand the two procedures and make the choice.