If you are planning to buy a term life insurance policy, what is the greatest concern you have?
Your greatest concern most likely is: Whether the insurer will settle the claim on my demise?
And this question is very important because if the insurer does not pay the claim, all the premiums paid go waste. More importantly, if the insurer rejects the claim, your family can face serious financial problems. Think about your outstanding home loan. Or kids’ education. Or parents’ wellbeing.
Therefore, as a prospective buyer, you would want to assuage such concerns, wouldn’t you?
How do you reduce chances of claim rejection?
Well, there are two ways.
- Pick up a company that has a good record of settling life insurance claims AND
- Do not give any chance to the life insurer to reject your claim. You do this by making complete medical disclosures while purchasing the plan.
We will come to (2) in the later part of this post. Let’s focus on (1).
For (1), we can look at the past claims settlement data of life insurance companies. If a company has a good claims payment record, you can expect it to continue the good record. Yes, there is no guarantee. However, it is still a better choice than a company with a bad claim settlement record. Agree?
In January 2022, IRDA, the insurance regulator, published the claim settlement data for life insurers for FY2020-2021. Let’s look at the data and see what it tells us.
Claim Settlement Ratio of Life Insurance Companies (FY2020-2021)
A 95% claim settlement ratio means the company settled 95 out of every 100 claims received.
Obviously, higher the better.
All but 2 companies report claims settlement ratio of 95% or more.
14 out of 23 companies boast of a settlement ratio greater than 98%.
3 companies report more than 99%.
But there is a problem. Sometimes, the numbers can hide more than they reveal.
This data is for all types of life insurance policies combined.
What if the insurance company is settling low value claims (in ULIPs or traditional plans) but rejecting high value claims (in term insurance plans)?
And that is possible. After all, the claim amount is a much bigger multiple of annual premium in the case of term insurance plans. For instance, a premium of 12K-15K per annum can get you a term life cover of Rs 1 crore. Sum Assured is 600-700X annual premium. Therefore, the insurance company (or the reinsurer) must pay a much bigger amount from its pocket in case of term plans.
Contrast this with traditional life insurance plans and ULIPs, where due to the tax rules and product structure, the Sum Assured usually is 10X annual premium.
With such economics, you would expect the life insurance companies NOT to pay claims happily in case of term insurance plans. They would investigate more and be keener to find ways to reject claims.
Now, since you want to buy a term life insurance plan, you would want to know the claim settlement record for term insurance plans. Unfortunately, neither IRDA nor the life insurance companies provide such data.
Fortunately, we have a proxy. The IRDA annual report provides claim settlement data by benefit amount too.
Claims Settlement Ratio by Benefit Amount (FY2020-2021)
Let’s say a life insurance company receives 1000 claims in a year. It approves 990 claims and rejects 10 claims.
Claim settlement ratio by number= 990/1000 = 99% (That’s good)
Now, let’s say, out of these 1000 claims, 950 claims were from traditional plans and ULIPs. And the remaining 50 claims were from term plans.
Let’s further assume that 950 claims were Rs 5 lacs each. And the term plan claims were Rs 1 crore each. The insurance company settles 100% of 950 claims from traditional plans and ULIPs but settles only 80% of the claims (40 out of 50) in term plans.
If we look at the claim settlement ratio by number, the claim settlement ratio is still 99%.
However, if we look at the claim settlement by benefit, the number is much lower.
The insurance company received claims worth 97.5 crores (950 x 5 lacs + 50 X 1 crore).
The insurance company settlement ratio worth 87.5 crores (950 X 5 lacs + 40 X 1 crore).
Claim settlement ratio by benefit amount = 89.75% (this number does not look good).
HDFC Life has a claim settlement ratio of 98% by number and only 80% by benefit amount. Not good.
I also reproduce below the average size of settled and rejected life insurance claims (for individual policies) in FY2021.
You can see the size of average rejected claims is much higher than settled claims.
You should expect greater scrutiny of high value claims but…
Yes, you must expect greater scrutiny because more money is at stake. Moreover, if one intends to defraud an insurance company, he is likely to do this by buying a high value policy like a term life insurance plan. However, it is not wise to assume that genuine cases are not rejected (where there was no intent of fraud).
Why would genuine cases get rejected?
Because of material non-disclosures.
If you do not disclose your health conditions at the time of policy purchase, the underwriting team cannot price the policy properly and the insurer is justified in rejecting the claim (after it discovers about undisclosed conditions).
Non-disclosure could be a case of omission. You forget to share a health condition with the company. Please don’t do that.
Or an act of commission. You deliberately hide details from the insurance company. No mercy for such buyers.
However, I know of cases where the sales executives from insurance companies mislead and encourage buyers to not disclose certain conditions as that would reduce chances of policy issuance. This is bad judgement on part of the buyer and the insurance companies share the blame. As a buyer, you must understand that salespersons’ incentives are linked to the number of policies they sell. Not linked to whether the claim on the policy sold was settled or rejected.
You can’t blame the life insurance company for rejecting claims for non-disclosures
If a company says they got too many fraudulent claims (or non-disclosure claims), please don’t buy the argument.
How is it possible that a particular company is getting more than its share of fraud and non-disclosure cases? Why would buyers hide try to defraud or hide their health conditions only from that insurance company? Makes no sense, right?
If a particular insurance company has a history of low claim settlement ratios by benefit amount, it is an indictment of their sales practices and their claim settlement culture.
Buy the term insurance plan from an insurer with more than 98% claim settlement ratio by number and more than 95% (or at least 90%) claim settlement ratio by benefit amount. Additionally, focus on the trend. If there is a sharp divergence between the 2 claim settlement ratios for a company for many years, you have a reason to be skeptical of such life insurer.
Don’t become complacent because of Section 45 of the Insurance Act, 2015
As per Section 45, a life insurance claim cannot be rejected if your insurance policy is over 3 years old. Thus, even if you hid a medical condition from the insurance company at the time of purchase, the insurance company has 3 years to find out about non-disclosure. After three years, the policy can’t be rejected on grounds on non-disclosure.
While this is comforting, don’t become complacent. Two reasons for this.
- The demise can happen before completion of 3 years, in which case the claim will likely be rejected, and your family will be left high and dry.
- Even if the demise happens after 3 years, the insurance company can reject the claim on some grounds and force you to approach the ombudsman or the courts. While Section 45 tilts the balance in your favour, you can never be certain of the case outcome. Moreover, the delay in the claim settlement and legal costs will burden your family.
Always remember, even a company with 99.5% claim settlement ratio by number has rejected 0.5% of the claims. If you are NOT diligent, you could fall in those unlucky 0.5% of the rejected claim applications. And a company with 95% settlement ratio settles 95% of the claims. Your case could be in those 95% settled claims.
Term Life Insurance plans are simple
Term life insurance plans have just one insured event. Demise of the policy holder. Unlike a health insurance plan where there can be disconnect between whether a particular treatment is covered or not, the insured event in a term insurance plan is rather objective. It is difficult to have a difference of opinion over whether a person is dead or alive. Therefore, the only cause of rejection could be that you did not make proper disclosures (medical or financial) at the time of policy purchase.
Hence, make complete health (and financial) disclosures while purchasing a life insurance plan. You don’t decide what information is material or not. Let the insurance company decide that.
Remember you won’t be around to contest any flaws in your application. Your family will have to fight it out. Only the insurance companies have access to the “recorded lines,” not your family. How will they contest the claims of the insurance company?
Therefore, if you are buying the policy over phone and disclose your health conditions to the sales executive, make it a point to share the same information with the insurance company over an email too. Copy such emails to a family member too. And ensure those health conditions are captured in the proposal form attached with your policy.
The insurers issue the insurance policies in good faith since there is a lot of information asymmetry. You know much more about your health than the insurer does. Keep your end of the bargain.
The post was first published in February 2022.