Personal Finance

Picking the right term insurance

Yvo Metzelaar | Updated on April 30, 2011 Published on April 30, 2011

The insurance regulatory framework provides certain guarantees on how customer obligations should be met. However it always remains important to make your own judgement.

While referring to term insurance here, we talk about contracts that give protection to the risk that you may live for too short. Let us assume you need a risk cover for Rs 5 crore. This is the basic cover you will need by international standards if you earn over Rs 50 lakh a year.

We also assume that the decision maker here — the person who will buy the policy — is 35 years old and wants to buy a 30-year policy. You could argue that — as it is a 30-year policy — the value of such cover will diminish with inflation. So, you need a policy where the sum assured increases every year (or five years) and therefore you would need an average cover over the policy term of Rs 10 crore. This Rs 10 crore cover will cost you around Rs 50 lakh, if you pay the premium all at one time (single premium).

Tough call

So who said term insurance is cheap? Roughly, you can assume that your 30-year term policy will cost you 5 per cent of the sum assured, based on the net present value of all future premiums you have to pay. The premium will depend on your gender, smoking habits, your medical condition and the provider. In short, while choosing an insurance policy you are making a Rs 50-lakh, long-term decision, and considering the amounts involved, selecting an appropriate provider is crucial.

Recognising the importance of the provider to fulfil its requirements, the insurance regulator has stipulated rules under which life insurance companies can operate. These include company structure, equity capital requirements, investment guidelines and product pricing criteria and general market conduct of such companies. However, as the industry is just 10 years old in India, it remains critical to take apply your own judgement on which provider to choose.

We list some key considerations you need to take into account:

Integrity: It can be defined in various ways but it will certainly include experience, professionalism, decision making process, intentions of the shareholders and the way products are being developed, designed and sold to the public. Three factors should guide you in your judgement here;

- General business conduct of the shareholders or promoters of the company

- Do they focus on this single venture or are the shareholders part of a conglomerate

- Do you “like” what you see – your personal views and affinity with the brand.

Financial strength: This includes revenue, reserves, investments and profitability of the insurer. In short, part of your premium is put into very safe government bonds to make sure the company can pay up when you “live too short”.

In general, all companies fulfil the stringent capital and investment requirements to be able to live up to obligations set by IRDA, including re-insurance arrangements. However, while all may fulfil regulatory requirements, do look for those who are better than others or are financially “sound”, including the way they keep their books and make disclosures.

Pricing and conditions: Look for how the premium is calculated and structured and if policy conditions make settlements more complicated. We leave this to the adviser you choose. Best go for an independent adviser who can give you multiple options.

These considerations are fairly obvious but what makes it complicated is that you need to assess them over a 30-year period. Why is this so important? Because if you would want to change your policy, say, 15 years later, you will have to pay a higher premium. And if you would have some ailment by that time, it will be next to impossible to continue with another provider at reasonable prices on the same conditions

Finally, as you can now choose from over 20 providers, the best way to go about it is to make your own shortlist of providers you feel pass the three criteria. Only then can you home in on the apt product.

The author is Group Director, Padmakshi Financial Services

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