The right questions before picking a high-value term plan

The rack rate of premia is seldom going to be the amount that the insurance company charges even the fittest of persons

The demand for term insurance policies has grown exponentially in recent times. The number of people taking such policies in excess of Rs 1 crore is high, with many looking to buy policies with sum assured of Rs 5 crore or more.

Some questions raised by those buying large-value term insurance policies are:

Quoted premium: It is only a display price. Unless you are supremely fit for your age, it is rare that you will get a large-value term policy at the display price. It is safe to assume the average person who seeks a term insurance policy will invariably have niggling health issues and different companies will hike premium rates differently, based on their understanding of these health issues. So, using these display premiums as a basis for the initial selection is hardly a fruitful exercise.

Company's death claims: The amendment to the Insurance Act in 2015 says a death claim cannot be rejected three years after the issuance of the policy on any grounds whatsoever. If a large death claim arises during the first three years of a policy, it would be investigated thoroughly even by an insurance company that may otherwise have a high ratio of death claims paid. If you have fully disclosed all facts and gone through the medical tests, there is no way a death claim can be rejected even within the first three years. I will go so far as to say that you can completely ignore the death claim paid ratio, if you are making full and complete disclosure of all facts.

Will the life insurance company be around to pay: There is no easy answer to this one. All life insurance companies are governed by the Insurance Regulatory and Development Authority of India and have to adhere to strict solvency margins. Having said that, we have seen international examples (fortunately, none in India) of Insurance companies going through issues despite strict regulation. The chances of an Indian life insurance company going bust are low, simply because most large insurance would be re-insured with re-insurer abroad. One should still choose a trusted life insurance brand. On this count, public sector firm Life Insurance Corporation scores highly because the payment of the value is guaranteed by the Government of India. Other large insurance brands being run by large banks in India should be equally good.

Will the insurer be willing to issue a large-value policy to you: Despite the high-decibel advertising, many life insurance companies might not be interested in issuing large-value life insurance policies, as they want to concentrate on moderate value policies while covering large number of people. That is part of their risk management strategy. Unfortunately, there is no way of knowing this in advance. The best way to reach an appropriate life insurance company is to approach brokers who service high-value insurance seekers. Your financial planner can direct you to an appropriate one.

Disclosure: Neither the writer, a Sebi -registered investment advisor, or any entities associated with him have any direct or indirect connection with any insurance broker