Choosing the right insurance plan is critical as one is, in a sense, deciding on his life value and entrusting it with a company. In case of any eventuality, one needs to be able to trust the company to provide the corpus to his dependents.
Type of life insurance. There are numerous options available, ranging from the pure-vanilla plans to ones that give the option of ?investment plus insurance?. If your primary objective is to avail a life cover, you should use the plain-vanilla cover. It is best to avail a term cover early on; one could choose the lowest quote and the longest term. For someone who is planning for other goals, such as retirement/children education, it could be a good preposition to look at insurance+investment plans. In this, you have the choice of going for traditional plans or Ulips ? if conservative, one should go for the former.
Assessing human life value. This involves understanding financial goals, assessing liabilities and, then, arriving at the actual amount of life cover required. As a thumb rule, one should hold at least 7-10 times of his annual income as life cover. If one were to conduct an elaborate evaluation, it could be a tad tedious, but well worth the trouble. An example:
Karnik, aged 30, has a household expense of R70,000 per month (excluding EMIs/investments). He has a two-year-old child, for whom he has assessed a requirement of R8 lakh for education and R3 lakh for marriage. The outstanding loan liability is R15 lakh (home loan) and his current value of investments is R10 lakh. He has his own home (where he stays and, hence, it is not liquidable). His current insurance cover is R12 lakh. For the life cover requirement, see graphic. The example assumes an inflation of 6%, life expectancy of 100 years and returns of 7.5%.
Claims settlement ratio. State-owned Life Insurance Company of India has managed to stay on top on the claims ratio with claims settled at 97.5 and the claims repudiated (claims rejected) at 1.09. On the traditional plans front, LIC still remains immensely popular. ICICI Prudential and HDFC Life are gaining popularity and have managed a good claim settlement ratio too. The rejection rate has been on a slightly higher side recently, given the ease at which one can acquire these plans, there have been instances of non-disclosure of previous illnesses.
The repudiation ratio improves over a period of time because in case of death within two years (early death claims) of the issue of the policy, there is a need for investigation. So, for the newer companies, the proportion of early death claims always remains high. Hence, the ratio becomes skewed, which ends up showing LIC in better light than the private
While looking at financial planning, it is important to evaluate the human life value. HLV should not be seen as a one-time exercise. As standard of living and lifestyle are moving targets, they undergo changes and the HLV will also change proportionally .
The writer is CEO and founder of Right Horizons
