Buying a life insurance policy is an important decision for most of us. Here, we discuss a less-addressed factor relating to life insurance — choosing the life insurance company to buy a term insurance policy.
A life insurance contract is a hedge against mortality risk — the risk of premature death of an income-earning member of a family. It is important the beneficiary of the life insurance policy gets the full sum insured in quick time in the event of a premature demise of the individual (called the insured). To this end, choosing the life insurance company from which you will buy the policy is important.
An important metric to determine the credibility of an insurance company is the claims’ settlement ratio. This is the ratio of claims settled by an insurer against total claims filed. True, a high ratio (above 95%) is good. It tells you the insurance company is honouring its commitment. But that may not be enough. You also want to know if the claims are settled in quick time and in full.
The insured pays regular premiums on the policy for many years in the hope the insurance company will honour its commitment after the insured’s death. Therefore, you must also consider the financial health of the life insurance company. One indicator is the persistency ratio. This refers to the proportion of policies that are renewed every year. The higher the ratio, better the financial stability of the company, other factors remaining same. The argument is that you must buy a life insurance policy from a company that will outlive you! Note, just because a large proportion of policies are renewed does not mean that customers’ experience with the company is good. A life insurance company will have to honour a claim only on the death of the insured. Till then, there is no-claim experience for the beneficiary. This is unlike health insurance contracts where individuals having filed a claim this year may decide to renew the policy the next year or switch to another insurance company depending on their claims experience.
The reputation risk of an insurance company is important. You must look for companies that have a long, and consistent track record of claims settlement. Remember that cheap is not necessarily the best.
Therefore, do not buy from an insurance company just because the policy premiums are low.
(The author offers training programmes for individuals to manage their personal investments)