5 Steps Process to Find a Best Term Life Insurance

Under term life insurance, a person insures himself for a specific period of time. if something happens to an insured person within that time period and policy is active then sum insured will be transferred to the nominee/beneficiary.

Example: Mr. X insured himself for a period of 30 years and if he dies in the 25th year then his nominee will get death benefits. An insurance can’t replace the value of a person but surely replace his income so, term insurance is important for every bread earner of the family.

Whole Life Insurance

Term and whole life insurance are opposite of each other. In term insurance a person can take a policy for a specific period only, not for the entire life. But for those who want to take a policy for whole life, they can choose Whole life insurance also known as Traditional Life Insurance.

This insured person can draw or borrow the money for this policy because it has a saving component. You will get a fixed rate of interest on your paid premium, also it is deductible from tax under 80C deduction.

But Whole life insurance is an illogical thing because its premium is 6 to 7 times higher as compared to term insurance. Here’s an example of how you should choose the right age limit for your insurance.

Ask yourself a question: what will be the age when no one depends on you? Suppose it's 65 years. When you will be 65+, your children will be near 30 and thus your children get self-dependent at that age most probably.

Why Term Life Insurance is Best?

For many people term life insurance is fascinating because it offers a very high cover like up to 25x of your income in low premium. For example: If you earn 5 lakhs in a year then you can easily get 1 crore insurance. If your income increases in the future then you can also top-up it easily. The premium for 1 crore insurance depends on your age. For example, your current age is 25. So, the premium will be as low as ₹500 per month.

Most beneficial point, if you take it when you are young, your premium will be accordingly low and it will never increase. The earlier is CHEAPER. After adding 1-2 riders the premium will be around ₹1500-₹1600 per month. Spending only 15000-16000 monthly for 1 crore insurance is a very good deal.

Five Step Process to Pick the Best Investment Company

As there are many companies which offers best of their services, so for individual it become difficult to choose best life insurance company.

Searching for insurance can be time consuming, so here are 5 steps which helps you to pick the best insurance for you and your dependents.

1. Claim Settlement Ratio (CSR)

A claim settlement ratio is a percentage of claims that an insurance company settles in a year out of the total claims.

For example: suppose the company passed 98 claims out of 100 claims and rejected 2 claims. So the claim settlement ratio is 98%.

Some good companies have a good CSR like 97%, 98% or even 99%. So, companies proudly show it on their website, or you can check this data on an aggregator like Policybazaar. Here’s a list of all top companies with CSR of above 95%.

There are some big names like Kotak, ICICI, HDFC, MAX LIFE, etc. But every company keeps its CSR high because they know costumes check it first of all. That’s why you need to check the second point which is the amount of settlement ratio.

2. Amount Settlement Ratio

Amount settlement ratio is calculated on claims which are settled out of the total amount. Again take the same example: suppose there are 100 claims and 98 claims are settled by the company.

The total value of those 100 claims were 10 crore rupees, and the value of each rejected claim was 50 lakh rupees, so the company passed the claim of 9 crore rupee out of 10 crore. Thus the amount settlement ratio is 90% here. This means that showing a high CSR is very easy for companies

They can pass small claims and reject the big claims. This will show its CSR high but the amount settlement ratio will be still low. Here’s a list of top companies with higher amount settlement ratio.

Always check the amount settlement ratio which can be found in the IRDA annual report. Here select those companies whose CSR is above 90% and reject the rest of all.

3. Claim Rejection Ratio

The claim rejection ratio indicates how many claims the insurer finds invalid and has not paid the claimed amount. Also, when companies get a lot of claims, there are some claims which are under process, those claims are not shown in the settlement ratio

So, this is equally important to know how many claims are rejected by the company out of 100. Here’s a list of companies with a claim rejection ratio below 1%.

When I checked the claim rejection ratio for these 10 companies, then I rejected the last 8 companies because these companies have more than 1% claim ratio. Now check the AUM of these companies.

4. Assets Under Management (AUM)

This means how much money is managed by a company. Because a company with high AUM is capable of passing the claims in times of crisis. These are three companies which have the highest AUM and have trust among the customers. Check the next step to find the perfect company for your life insurance.

5. Solvency Ratio

It means that how many times assets the company has compared to its liabilities, according to the rules this should be minimum 150%. This ratio change every quarter and this is not much important. As they have to follow the rule of maintaining the ratio of 1.5. But a higher ration is much better. If we see the solvency ratio of these companies.

All three companies have good solvency ratios but still TATA topped the list. By following the same 5 steps you can purchase the best life insurance.

Riders (Add On)

Adding riders in policy can be complex but it makes it more beneficial. So here are two riders which gives you more advantage.

1. Critical Illness

It's an extra insurance, you will get it only when you will face any critical illness diagnosis, usually people take it with health insurance but you should take it with term insurance because the term insurance premium will never increase after you take it. But health insurance premium increase with your age.

2. Accidental Liability

When a person has an accident and he is not able to go to work. So his income will stop in that case and his family needs support so you can take this rider. The premium will increase with riders, so take a limit which is best for you.

Always ask for T&C of riders while taking any policy from anywhere, as every company has different terms and you should be aware of it. It's better to take an online policy which will be cost-friendly. Although agents tell you that your claim will not pass online, it makes no sense.

New Offers of Policy Companies?

Nowadays, companies offer two benefits to policyholders

1. Limited Premium for 10 years

2. Return of premiums

Limited pay means you have to pay the double premium for the next 10 years. After 10 years you don’t have to pay any premium for your entire policy period.

Return of premium means you have to pay a double premium every month if you are still alive after policy ends, you will get the entire premium back.

People choose one of them because of two factors.

1. Fear

2. Greed

In insurance a wrong decision can take a lot from you. Insurance is just a single part of your personal finance. You also have to invest in other options like mutual funds, stocks, FD, PPF, etc.

While taking the insurance we just focus on our death like what benefit we get in case of death or if we don’t die. That’s why we pay the double premium instead we should invest our extra money to create wealth. Ask if we need wealth or not if we don’t die.

Ignore these two options because the company will invest your double premium charges but you will not get the returns. So you should invest that extra money on your own and create wealth.