What should be your check points before buying insurance?
Oct 08, 2013

Author: PersonalFN Content & Research Team

Insurance in its purest sense refers to indemnifying risk. Thus by having an adequate insurance cover you can protect against a financial loss / uncertainty which includes the risk of illness, disability, damage to property, and the most important of all - one's demise. Having an adequate insurance cover enables you and / or your family to maintain the standard of living despite of any mishaps or unforeseen tragic events that could have broken you financially. But mind you, that does not mean that you should buy an insurance cover arbitrarily.

You see, many of us make a mistake of combining our insurance and investments needs. Also just because you are entitled to a tax benefit, does not mean you should fall for luring sale pitch of insurance agents (which makes them rich by earning a fat commission) but leaves you with a wrong investment decision.

Before you blindly hawk into buying a policy from any insurer there are a few things you must check about the insurance company:

  • Promoter's Background: All of us check the goodwill of schools before taking admission for our children. We also analyse the reliability of companies while buying any consumer durables such as Air-Conditioner, Refrigerator etc. Similarly knowing the history / background of your insurer is of utmost importance, before you buy any insurance policy. Remember, the insurer indemnifies you against the risk, which you face, and hence assessing the promoter's background and their philosophy becomes very crucial. While planning your insurance, one wants to buy peace of mind, and not face the bother whether the insurance company would settle the claims or not. Hence, understanding the value systems of the company is important.
  • Number of years of existence: Well, it is always said that experience counts and in our opinion too it does! It would be prudent to go with season players (insurers) rather than the one who are relatively new entrants in the business of insurance. However in case you do choose any new entrant, then it becomes prudent to evaluate them. You must analyse the streams of other businesses operated by their promoters and their success rates along with ethics while operating such businesses.
  • Financial Background: Just having a fantastic value system and good number of years of existence, but not having the financial strength to back it, would not do any good when it comes to settling claims. What is required is a robust financial muscle, which will lead to better claim satisfaction. You don't require a toothless tiger. A well-established insurance company with a proven track record is in a better position to give you that extra bit of peace of mind.

    But then you would ask what parameters should one check in order to gauge the financial strength? Well, you may take help of some of the parameters mentioned below:
    • Claim Settlement Ratio (CSR): CSR will help you assess the percentage of claims settled, against the total claims lodged with the insurer. If you are looking for worry free nights and peace of mind it is very vital to check the CSR of the insurer. While doing this study, it also becomes imperative to know the claim settlement procedure, from your insurer or the insurance agents, and assess whether you are comfortable with the same. And it is important to note that your honesty also pays - one should not mention any mendacious information while filling in the form and disclose all the relevant information pertaining to you and your family. One may escape the underwriter's eye at the initial stage of getting the policy, but this would back fire on you while settling your claims, as the underwriter might put down his foot on some issues which do not satisfy the underwriting provisions of the insurer. So, a low CSR may not always reveal the financial weakness of the insurer.
    • Solvency Ratio: This ratio reveals the strength in the balance sheet of the insurance company and the capability of the insurance company to settle insurance claims. It takes into account the net worth and the reserves and surplus held by the insurer.
    • Profitability Ratio: This ratio reveals whether the insurance company generates enough income for its stakeholders after meeting all the expenses (both operating as well as non-operating expenses). While profitability, may not appear as important as the claim settlement and solvency ratio, but it needs to be gauged to ensure the efficiency and effectiveness with which the insurance company is run. Remember, only when the business is profitable, the promoters will find prudence in continuing with the same.
  • Reading the Devil in the Fine Print: Merely trusting, what your insurer or insurance agent says and signing (an insurance form) will not do much good to you in the long run. It is imperative that you read all the relevant insurance documents, rather than dumping them in some corner of your house or office. The devil in the fine can also roar a big "NO" during times of settling claims, as there may be several exclusions which may be a part of the policy which intend buying. Hence it is very important to read all the terms and conditions attached to the policy.

Also, you must keep in mind that in case you are buying an insurance policy from an agent then you must also be careful about which agent you choose. It is prudent to select an agent or broker who has a tie-ups with multiple insurance companies instead of only one particular company. This will give you access to various products from different insurers under one roof and also better co-ordination in terms of accessing the services of the broker. An ideal agent must have qualitative product knowledge and sufficient experience in the industry. A well-established agent is always preferred to get the advantage of both - right insurance planning and satisfactory after sale services.

PersonalFN is of the view that taking an insurance policy from any insurer or agent without checking for their suitability and claim settlement capability is as good as not taking any policy at all. If you don't wish to have sleepless nights and want to feel protected from financial losses and uncertainties in the true sense then it is extremely necessary to keep the above check points in mind before buying any insurance policy.

Add Comments

Nov 29, 2013

One must note certain factors before taking a health policy.What is your worst nightmare? Isn’t it that the insurance agency will not pay your family the claimed amount when you are not around and can do nothing about it? .Don’t you think it is wise to check the Insurance Agencies Claim Settlement Ratio?

The next point to be noted is claim repudiation ratio.This is basically the percentage of claims rejected by the insurance agency and is a better ratio to measure the claim settlement of an insurer.

Checking the margin of solvency is also very important.This is basically the assets of the life insurance agency such as fixed assets and investible assets minus the liabilities of the insurance agency which are the claims to be paid out. An insurance company has future payouts to make and calculates its liability based on these future payouts. In India the insurance agencies need to maintain the solvency margin of 150%.However this margin is not having assets 1.5 times the liabilities but the ratio of the actual solvency margin to the required solvency margin is 150%.

Always check for rider benefits.The term insurance policy with a critical illness rider is a must have for a young working individual during his initial working years as it serves as a wealth builder during the time in which his earning are relatively lesser.
Oct 09, 2013

Details of the ratios such as Claim settlement,solvency,liquidity of the various popular insurerslike LIC,BirlaSL,MaxBupa,BajajAllainz etc; if provided, will surely help potential insurance buyers in taking a correct decision. Knowing that one should look at these ratios without knowing how and where to access them -such knowledge is of no use, in my opinion. I find this to be the case with many other financial service providers also. It means that either the data is not easily available or it is available at a price. If one needs to pay to access this data, maybe better to mention that as well. regards.
Oct 15, 2013

You have to have your insurance and dotcor change your address in their records. I got my own insurance and live on my own. The insurance has my new address but the dotcor didn't. So I had to make sure both were changed.

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