Go by performance, not only insurance premium

To minimise the chance of disappointment, look at other parameters like persistency ratio, speed of claim settlement and other crucial factors

Insurance is a product that is usually sold, rarely purchased. People normally buy it when it is hard-sold by an agent. Very few make the effort to research the product themselves and buy the one they like best, as happens commonly in the case of investment products. The more evolved buyers go to aggregator websites and compare premiums. While this number is important, especially in the case of term insurance, you should also evaluate a few others to get a holistic picture.

Premium: When buying a term plan, the premium you pay is by far the most important number. "The product features and exclusions in term plans are all standardised. Hence, I would give a 60 per cent weightage to premium in my purchase decision," says Kapil Mehta, founder and chief executive officer, Secure Now Insurance Broker. The best places to look for premium rates are the web sites of insurers. While aggregator websites do give you premium rates of many players at one go, there is sometimes the risk that some of the lowest-cost players might be excluded. Besides premium, pay heed to payment structure in case of term insurers. Many now offer annual or monthly payouts to the family, at times even adjusted by inflation, a useful feature if money management is not your spouse's forte.

Historical performance of funds: When buying a unit-linked insurance plan (Ulip), the historical returns of funds should be your primary criterion. "After the new guidelines on Ulips were passed by the Insurance Regulatory and Development Authority of India (Irdai) in 2010, the cost structure of Ulips has become uniform. The only aspect through which an insurer can distinguish itself from others is the returns of funds," says Mehta.

In the case of Ulips, going with an older company can work to your advantage, as longer-term data on fund performance will be available for it. "Look for consistency in fund performance," advises Dhiraj Kalra, director, HII Insurance Broking.

The Morningstar India website is one resource you could turn to for this information. It offers comparison of the fund's performance vis-a-vis the category average. The fund's rank within the category is also provided.

Persistency: It tells you the percentage of policies sold by an insurer that continue to be in force after a certain period (one year, two years, etc). If a company has a higher persistency number, it indicates that it sells products that people are comfortable in holding. "Customers mostly stop paying the premium because they were mis-sold and their expectations from the product were not met. Only in a few cases do they stop paying because of financial constraints or other reasons. So a high persistency ratio reflects higher customer satisfaction," says Kalra. This data is available in the Handbook on Indian Insurance Statistics (go to Irdai's home page/Reports/Handbook).

Claim settlement ratio: This tells you the number of claims settled by the life insurer vis-a-vis the total number of claims received. Aggregate data on the industry is available in Irdai's annual report. While Life Insurance Corporation (LIC) settled 98.2 per cent of claims in 2014-15, the private players settled 89.4 per cent. The sector as a whole settled 97 per cent of claims made (by number of policies). However, data from the Handbook says that only 90.9 per cent of claims by value were settled. "There are two conclusions that you can draw from these figures. One, a claim settlement ratio of around 90 per cent or more indicates that most claims do get paid out. That is a good sign. Some claims will always get rejected if they are not clean. Second, the discrepancy between the number and the value figure indicates that there is a higher probability of bigger claims getting rejected, which is worrisome," says Mehta.

Speed of claim settlement: Delay in claim settlement can be a major headache for the near and dear ones, hence it is important to go with a player that settles claims faster.

"This number can be interpreted to indicate the process efficiency of an insurer," says Arvind Laddha, CEO, Vantage Insurance Brokers. The Handbook offers data on speed of claim settlement. By comparing players on proportion of claims settled within 31 days, you can get an idea of which insurer settles claims faster (see table).

Size: When buying a traditional plan, go with a bigger company. "If the company has been around for some time and is profitable, it will tend to give higher bonuses," says Mehta.

Adds Laddha: "Size is a useful indicator to the extent that it indicates financial strength." Information on business in force is available for individual companies both by number and value of policies in the Handbook.

These numbers can provide another crucial insight. "If you divide the total sum assured of an insurer by the total number of policies, you get sum assured per policy. If a company has a higher sum assured per policy, it tells you that it is more protection oriented and you should go with it when buying protection-oriented products," says Mehta.

Above, we have explained the numbers that matter and the sources where they are available. Since life insurance is an important purchase, do spend a few hours on the internet doing the necessary research to get this decision right.