Category: Insurance

One of the questions that came up a few times in the last term insurance post was how much insurance should you get and Hema wrote a comment with a rule of thumb that states you need about 10 times your annual salary.

That sounds reasonable enough to me and I wouldn’t want to get into an analysis paralysis with determining how much insurance I need because term insurance can be bought without spending a lot of money, but I did want to share the way I thought about it, and see what feedback I can get.

Do I Need Insurance?

The first thing to do is to determine if you need term insurance at all or not. The answer to that is straightforward – if you have people who are financially dependent on you then you need term insurance, else you don’t.

If your parents are not financially dependent on you, your spouse is working, and you don’t have kids, then I don’t really see a need for insurance.

But, if someone is financially dependent on you then you need to take out insurance.

How Much Insurance Do I Need?

So, once you determine that you need insurance, the next step is to think about how much insurance you need. One way of thinking about that is to think of your dependents and their annual financial needs, then buffer it up by 20% or so.

For example, say you determine that their annual expense will be 5 lacs, so at a 20% buffer you need 6 lacs per annum. To generate 6 lacs per year you need capital of 60 lacs assuming the investment can generate 10%.

Then think about the assets you already own – your savings for retirement, any real estate (apart from the house you live in), jewelery, or whatever you think can be practically cashed in.

Subtract that from the capital amount, and you will get a number that you should have cover for.

I expect that most people will be able to do this calculation mentally and it shouldn’t take more than 5 minutes or so. In my opinion this will be a good ball park in terms of  your term insurance need and can get you started.

This kind of thinking is better than having no framework at all, but the only thing I’d caution you against is that this calculation doesn’t take into account escalating costs.

So, you could say that your family’s expenses will rise significantly once your children start going to school, and this method doesn’t take that into account. Or if inflation continues to be high then this method doesn’t protect your family many years from now as well.

If you feel that’s the case, then get more cover – how much more depends on how much more in premium you’ll be able to afford. No point in talking about cover without thinking about premium – just like risk and return.

One last thing about this is to bring to your notice this insurance calculator I found which allows you to input a lot of parameters and seems quite exhaustive. You can play with it and see if it gives you a reasonable number.

How many insurance policies should I buy?

In my last post I expressed my preference on buying two different insurance policies, as a means to hedge risk and quite a few of you pointed out that it doesn’t make sense because there is no chance of a claim getting rejected if all the information provided upfront is accurate and honest.

I understand this point of view, but would rather stick to two policies because there will always be some things that you don’t know that you don’t know.

There are things that you know you don’t know, and then there are some things that you don’t know you don’t know.

For example – you buy an oil ETF that tracks oil prices by buying future contracts because you are bullish on oil. You know that this ETF will not be able to track oil 100% due to expenses or other tracking errors, so this is a known – unknown, but you don’t know that you don’t know big institutional traders can game the system because they know this ETF has to square off its positions every month end, and that eats your profits big time.

So you are hit by a factor that you didn’t even know existed.

That’s primarily my reason for buying two policies – what if the cheaper company goes bust, who is liable then? What other things don’t I know about this?

Obviously not everyone is so risk – averse (or cynical?), but that’s my rationale for two insurers.

Those were my thoughts on whether you need insurance, how much you need, and how many policies you should buy. Time for your thoughts now.

 

As expected, there was a phenomenal discussion on yesterday’s post about term insurer’s sample quotes, and among the many great comments there – Salil left a comment about Form L-40, which is a mandatory disclosure that all life insurers have to make about the number of outstanding claims, new claims filed with them, number of claims they settled, and the number that they repudiated.

I went to the IRDA website, and sure enough it had links to the disclosure pages of all the insurers, and I was able to consolidate the data from those links.

I chose December 31st 2010 quarter because I wanted to compare a recent quarter and that was one which most insurers had info about. In a few cases where I didn’t find information about that quarter I took another quarter and that is showed in the table header.

I left the insurers that had no quarterly data available but there were just 3 of those.

The next thing I did was to consider data only for deaths because that’s what we’re interested in.

I have split the data into 3 tables because that is easier to read.

Now, the claims repudiated are further reported as claims repudiated that were less than 2 years old, and claims repudiated that were greater than 2 years old. Insurers that have been around for longer like LIC will have a lot of claims that are more than 2 years old, and they can’t ordinarily challenge those claims. However, the fact that there are claims repudiated that are more than 2 years old shows that there are some exceptions to this – most probably where you can establish fraud. If any of you know what this is then please do leave a comment. In the case of LIC – out of the 506 claims they repudiated 443 were of less than 2 years, and 63 were greater than 2 years, so about 12.5% of the claims they repudiated were older than 2 years – not an insignificant number.

This makes for great reading along with the sample quotes because this shows you the volume of business each insurer is doing, and how they fare in terms of paying out claims.

1	Insurer	Aegon Religare	Bharti AXA Life Insurance	Bajaj Allianz Life Ins	Birla Sunlife	Canara HSBC OBC Life Ins	DLF Pramerica
2	Claims O/S at the beginning of the year	22	127	2,548	173	74	14
3	Claims reported during the year	27	222	6,485	3,113	72	17
4	Claim settled during the period	13	168	6,268	3,029	50	6
5	Claims repudiated during the period	20	24	465	146	11	6

Here is the next table.

1	Insurer	Future Generali	HDFC Life	IDBI Federal	India Life (for 31st March 2011)	ING Life	Kotak Life
2	Claims O/S at the beginning of the year	2	208	70	–	112	411
3	Claims reported during the year	230	1,196	105	13	1,550	631
4	Claim settled during the period	162	1,139	75	7	1,462	627
5	Claims repudiated during the period	51	40	19	1	58	33

Here is the last one.

1	Insurer	SBI Life	Shriram Life (June 2010)	Tata AIG	LIC	Reliance Life	Sahara Life (Sep 2010)
2	Claims O/S at the beginning of the year	685	475	26	53,765	957	281
3	Claims reported during the year	5,745	212	883	181,165	4,025	233
4	Claim settled during the period	4,622	197	702	182,211	3,272	156
5	Claims repudiated during the period	894	138	152	506	256	70

Finally, here is a chart on the claims settled as a percentage of new plus outstanding claims for the quarter of December 31st 2010 (in most cases). (Click twice to magnify).

 

 

 

Now you have quote data, and you have volume data, so you can take a look at that and see how that stacks up. I’ll not give any opinion on these numbers because I’m still not very certain what to make of them myself, and feel that we need to look at some more data.

In the meantime, please leave your comments on what you make of all this data, and also on how to build to this post.

This is turning out to be the best reader driven discussion we’ve had so far, and it’s only appropriate because a lot of you have much more knowledge on insurance than I do.

Finally here are the links to the sources, and apologies for not responding to comments – had limited time and thought this exercise was more meaningful.

http://www.aegonreligare.com/financials.php

http://www.bharti-axalife.com/pdf/Q3-L-40_Claims_data.pdf

http://www.bajajallianz.com/Corp/aboutus/financial-info.jsp

http://insurance.birlasunlife.com/AboutUs/PublicDisclosure/tabid/386/Default.aspx             http://www.canarahsbclife.com/lifeapp/portal/canh/financialStatement

http://www.dlfpramericalife.com/PublicDisclousres.aspx

http://www.futuregenerali.in/LifeInsurance/LifeOther/LifeOtherPages/PublicDisclosure.aspx#  http://www.hdfclife.com/AboutUs/AboutUsFinancialHighlights.aspx

http://www.idbifederal.com/Pages/FinancialStatement.aspx?Year=null

http://www.indiafirstlife.com/web/indiafirst/public-disclosure

http://www.inglife.co.in/aboutus/financialstatement.aspx

http://insurance.kotak.com/about-us/corporate-overview.php#

http://www.reliancelife.com/rlic/AboutUs/Financepage.aspx

http://www.saharalife.com/temp/viewreport.asp

http://www.sbilife.co.in/sbilife/content/37_4190

http://www.shriramlife.com/formslist6.jsp;jsessionid=04B83A3EB4E5C4834D20C039209DEA79           http://www.tata-aig-life.com/public-disclosure/public-disclosure-2011-q3.html

http://www.licindia.in/publicdiscloser/2010-2011/122010/index.html

I have never written about ULIPs here because I don’t like them one bit, and as a result don’t read or pay any attention to them. But last week a friend told me about a ULIP plan he was interested in, and I went in and checked it out a bit. That post is still work in progress, but I read this piece about SEBI issuing a show-cause notice to an insurance company, and thought I’d do a quick post about why I don’t like ULIPs.

From Moneycontrol:

Capital markets regulator Securities and Exchange Board of India, or SEBI, has issued a showcause notice to an insurance company, learns CNBC-TV18 quoting sources. This comes in the wake of insurance companies transgressing into the mutual fund territory, report CNBC-TV18’s Mrinalini Krishna and Avni Raja.

SEBI has sought an explanation from the company asking why one of its insurance products does not have an insurance cover and whether this amounts to selling mutual funds.

This is the reason I dislike ULIPs. Insurance and mutual fund investment are two different things, and they really don’t go well together at all.

People like ULIPs because they don’t like wasting money on insurance. Most people I speak to think of ULIPs as insurance that will get them at least some money back at the end of the plan, instead of term insurance which is just sunk cost.

The fact of the matter is – term insurance is significantly cheaper in terms of pure insurance and while you may think you are getting something back with ULIPs, you end up paying a lot more for insurance, and the investment portion of it is subject to market fluctuations anyway, so there is no real gain there either.

I am going to take a closer look at ULIPs next year because a lot of people are interested in them, but I strongly suggest that before buying a ULIP, you check out the term insurance rates from LIC to see how much you would have to pay for just insurance. That might just change your mind. Here is the link to check that out.

Photo Credit: Wheat_in_your_hair