Insurance & Life: Purchasing Term policy, Claim Settlement Ratio & Process

Can I purchase Term policy from Private companies? Is it safe?
Yes. You can purchase term policy from any life insurance company of your choice whether it is private or government. All companies are controlled by the same regulator (IRDAI – Insurance Regulatory & Development Authority of India) and are safe.

Claim Settlement Ratio
If an insurance company is settling 95 claims out of 100 claims reported, it is having the claim settlement ratio of 95%. But it is still not guaranteeing that your claim will be settled, if you purchase a policy from that company. If you have not disclosed your health issues while purchasing the policy, your claim may fall in the 5% rejected cases. But even if you are purchasing a policy with prompt disclosures
from a company with just 90% claim settlement ratio, your case will fall in the 90% and the nominee will get the claim.
As per the current regulatory mechanism, no company can reject a genuine claim. If it is rejected, there are many forums where nominee can complain and get it addressed. What is important from your side is a prompt disclosure while purchasing the policy.

Claim Settlement Process
In case of death of the policy holder, the claimant should inform the insurance company at the earliest with the following details.
1. Name of the policy holder
2. Policy Number
3. Date of death
4. Place of death
5. Cause of death
6. Name of the claimant & his relation to the policy holder.

The claimant will be asked to submit the following documents
1. Policy bond
2. Death Certificate
3. Proof of age (if not submitted earlier)
4. Deed of assignment (if any)
In case of early claim (claim within 3 years of purchase or revival of the policy),the additional requirements are:
1. Statement from the hospital if the deceased had been admitted to hospital
2. Certificate of medical attendant of the deceased giving details of his/her last illness
3. Certificate of cremation or burial to be given by a person of known character and responsibility present at the cremation or burial of the body of the deceased
4. Certificate by employer if the deceased was an employee In case of unnatural death, postmortem report / police inquest report etc is also required.

Why insurance policies should not be purchased for tax saving purpose?

There are many people purchasing life insurance policies for tax savings under Section 80C. It is not a good idea purchasing such long term policies with yearly premium commitment for long term. Instead, you can open a Public Provident Fund (PPF) and also invest in ELSS mutual funds. Every year you can decide the amount to be invested in these 2 instruments depending on your requirement for Section 80C. At young ages, you can invest more in ELSS fund while at higher ages you can invest more in PPF. Both these options offer flexibility and better returns than the life insurance policies. You can invest in these as per your requirement – no fixed commitment and better returns!

Term policy till age 85? Is it needed?
Till what age you need a term insurance? This is a million dollar question. Before answering this, let me share the premium details.

If you are aged 35, the annual premium for a 1 Crore policy will be around 12500 if you opt for a 25 year policy which covers you till age 60. But if you opt for a 50 year policy which covers you till age 85, the annual premium is around 25,000, payable till age 60. It is almost double.

You need life insurance cover till your family is financially dependent on you. If you are planning retirement by age 55 or 60, there is no need for a life insurance cover after age 60. In the case of professionals like doctors who start career late and practice for long term, coverage can be till 65 or till their children are settled down.

Some people believe that coverage till 85 can help their family in getting the sum assured of 1 Crore. But it is not a good thought. What is the advantage of paying double the premium for 25 years to give that 1 Crore to the family.

Also note that the present value of that 1 Crore after 50 years will be around 5 Lakhs if adjusted for inflation. What if you live beyond 85?

If you invest that difference in premium (25,000 – 12,500 = 12,500) for 25 years in a mix of equity & debt generating 9% return, you will have around10 Lakhs at the age of 60. This 10 Lakhs can contribute around 90 Lakhs at age 85 assuming a CAGR of 9%.