Term insurance: Pick insurer with consistently high claim settlement ratio

A strong persistency ratio signals customer trust, better service and fewer disputes, while a high claim settlement ratio shows how reliably an insurer honours claims-key checks before buying term cov

The recent GST exemption on term insurance has made pure protection plans significantly more affordable, leading to a surge in first-time buyers, according to media reports. Several leading life insurers, such as HDFC, Axis and SBI, have seen higher sales of term covers.

 

How should buyers decide the right coverage amount?

 

Buyers may adopt either a thumb rule or a need-based approach to deciding the amount of term cover they should buy. “A simple thumb rule is 15–20 times annual income for salaried individuals, and 10–15 times average annual profit for self-employed buyers,” says Narendra Bharindwal, president, Insurance Brokers Association of India. 

For a more accurate calculation, they should follow the needs-based method. “This takes into consideration outstanding liabilities, like home loan, education loan and business debt; future family expenses like children’s education, marriage and lifestyle costs; income replacement or the number of years your family will depend on your income,” adds Bharindwal. All these can be adjusted against existing assets, such as savings, investments, provident fund, company benefits and so on. 

“Young earners should ideally start with a minimum ₹1 crore cover to stay protected against rising costs and inflation,” says Shilpa Arora, co-founder and chief operating officer, Insurance Samadhan.

 

What is the most suitable policy tenure for buyers?

 

The buyer should match the policy period to the years in which their family or dependants would require financial support if the breadwinner were no longer there. “The goal is for the coverage to end when you no longer have outstanding financial obligations or income to replace for your loved ones,” says Bhavna Verma, chief and appointed actuary, IndiaFirst Life. She adds that the realistic retirement age should be the minimum benchmark, but one should add some buffer for adverse outcomes.

 

Arora says extending cover beyond 60–65 increases premiums without offering real value.

 

Should buyers opt for a level cover or an increasing cover?

 

This decision depends on the policyholder’s priorities. A level cover ensures a fixed sum assured throughout the policy term. “It suits buyers with plateaued liabilities who want a fixed sum assured with a consistent premium,” says Milind Tayde, head – employee benefits, Anand Rathi Insurance Broking. It is also more affordable.

 

Under the increasing cover option, the sum assured grows annually. “This helps the cover keep pace with inflation and rising lifestyle costs,” says Rajeev Chugh, chief financial officer, Generali Central Life Insurance. According to him, younger customers in the 28–40 age bracket should opt for increasing cover as their financial commitments are likely to rise in the future.

 

Nochiketa Dixit, managing director – industries, EdME Insurance Brokers, points out that it ensures continued insurability without fresh medical tests.

 

Which payout option and riders should customers consider?

 

Customers can opt for a lump sum payout, a monthly payout or a combination of the two.

 

“A lump sum works better in a scenario where the family can manage large amounts of claims payout in a responsible manner. A monthly payout is recommended when the family is not very financially evolved, thereby ensuring a predictable cash flow after the demise of the insured,” says Tayde. According to him, the right payout method is a combination of the two.

 

Buyers should include a few essential riders to make their coverage more comprehensive. “Essential riders that enhance protection at a modest cost include accidental death benefit, critical illness and waiver of premium,” says Dixit.

 

What key parameters must buyers check before purchase?

 

Claim settlement ratio (CSR): It shows the percentage of claims an insurer pays out of the total claims received in a year. “A consistently high CSR, ideally above 97 per cent, indicates that the insurer honours claims reliably and has efficient claim-processing practices. Also check the three-year or five-year average CSR, as a single year’s data can be misleading,” says Verma. She suggests looking at the claim amount settlement ratio also to understand how insurers handle large claims. “Reviewing turnaround time, reasons for claim repudiation and grievance data gives a fuller picture,” adds Verma.

 

Persistency ratio: It shows how many customers continue their policies year after year. “A higher persistency ratio indicates trust, better service and fewer disputes,” says Arora.

 

Premium comparison: Non-competitive premium is a non-starter in a price-sensitive market, according to Tayde. “Ensure the same sum assured, tenure, riders and payout options while comparing,” says Bharindwal. He recommends not choosing solely on price, as very low premiums could indicate stricter underwriting or limited features.

 

Underwriting terms: Buyers should go with a player that has transparent underwriting, as this ensures smoother claim settlement later. “Check medical requirements, how health conditions are evaluated and whether your lifestyle disclosures impact premiums,” says Arora.

 

What exclusions should buyers watch out for?

 

Before purchase, buyers must properly understand what is excluded from coverage. “Common exclusions include death due to self-inflicted injuries within a specified waiting period, participation in hazardous activities without declaration, non-disclosure of pre-existing conditions and deaths arising from unlawful acts,” says Chugh.

 

Dixit urges customers to check for exclusion of high-risk activities. 

Key dos and don’ts

• Avoid delaying purchase as costs rise
• Annual premium payment is more economical than monthly
• Complete nominations and inform nominees
• Use free-look to make corrections
• Review cover every 3-5 years

The writer is a Mumbai-based independent journalist