All you need to know about Critical Illness Covers

A critical Illness is a life threatening disease that disables you from performing your normal occupation. Various studies have revealed that the incidence of Critical Illnesses have increased manifold. Reasons are many, and these include stress, a sedentary lifestyle, junk food, lack of physical exercise and so on. Nevertheless the fact is that along with the incidence rates, also increasing are the costs of treatment. It makes eminent sense to purchase a Critical Illness (CI) cover from an Insurance Company.

Which Illnesses are Critical:

In India, Critical Illness covers are sold as stand-alone policies by General Insurance companies and as add-on covers (riders) by Life Insurance companies. This means that if you wish to buy a CI cover from a life company, you must have an existing life policy with them.  Most companies (Life or General) cover at least the top 6 Critical Illnesses:

1.       First Heart Attack

2.       Stroke (Cardio Vascular Accident or CVA)

3.       Cancer

4.       Kidney Failure

5.       Major Organ Transplant

6.       Heart By-pass Surgery

Several companies cover more illnesses in varying numbers, even up to 12. They add Alzheimer’s, Burns, specific forms of cancer and so on. Premiums increase based on the number of illnesses covered. While you are the best judge for your requirements, our view is that the first 6 are enough.

Lump sum or Accelerated:

 CI covers are usually fixed benefit covers which means that they pay out a fixed amount on diagnosis, irrespective of the actual expenditure incurred. General Insurance companies follow the lump sum mechanism. However life companies tend to divide CI riders into 2 types:

Lump sum CI Rider: This is the normal mechanism, where on diagnosis, the fixed cover amount is paid out.

Accelerated CI Rider: Under this method, the fixed cover amount is paid out as above, however this amount is reduced from the total life cover on death or maturity.

For example:

Let us have a life policy of 100,000 life cover with a CI rider of 50,000.

·         On the diagnosis of a CI, if you have a lump sum rider, you will immediately be paid Rs 50000. The CI rider is extinguished, the policy continues as usual, and on death or maturity, 100000 will be paid out.

·         On the other hand, if you have an accelerated rider, you will immediately be paid Rs 50000. The CI rider is extinguished, the policy continues as usual, and on death or maturity, the balance 50,000 will be paid out.

It is obvious that Accelerated CI riders are cheaper.

Our View:

We prefer comprehensive coverage hence would advise buying a CI policy from a General Insurance Company or a lump sum CI rider from a Life Insurance Company.

To know which one is best for you, log onto www.policylitmus.com to find comparisons of over 1000+ products from 50 insurance companies.

Policylitmus

Will the Private Insurers Last for Another 25 years.

Life Insurance is a long term contract and like any contract that operates over a long time, the customer asks himself if the provider is going to last for the entire term of his contract. This is a legitimate question as the contract is of no use if the company ceases to exist.

In my opinion this is not a question that should bother you too much.  Let me explain why.

Firstly, the Insurer underwriting your policy cannot carry the whole risk by himself. The insurer in turn sells (re-insures in technical terms) a large part of the risk to a re-insurer.  Re-insuring risk re-distributes the risk among a wider population than is the Insurer’s direct market, thereby reducing the risk to the Insurer. This is similar to a person reducing the risk of the equity market by investing a basket of stocks instead of a select few.  A typical life insurer re-insures about 80% of the risk. Should a claim occur then a proportional amount of the claims will be paid by the re-insurer. 

Secondly IRDA, the Insurance regulator in India, requires the insurers to maintain enough capital to pay for all the risks it has taken on. This is called reserve in technical parlance.  In India insurers are required to maintain a reserve of 1.5 times the total anticipated claims.  This ratio is known as the solvency ratio. Insurers are required at least on an annual basis to review how much claims they would be expected to pay on the business they have taken on.  The total capital they are required to maintain is 1.5 times the anticipated claims amount.  The average solvency ratio in India for Life insurers is 3.4 at the end of FY2012-13.  All regulators watch this ratio like a hawk.

Ironically the life insurer with the lowest solvency ratio (of 1.58) is LIC. But worry not, LIC has a Sovereign guarantee and should LIC be insolvent then our government will dip into the tax payer’s pocket to pay the policyholder’s claims.  Private Insurers with no ability to dip into the tax payer’s pocket maintain a solvency ratio of 1.81 to 6.43. A solvency ratio of higher than 2.0 is taken as adequate capital in almost all major countries worldwide.

Policylitmus

You can check the solvency ratio of Indian Insurers at www.policylitmus.com

Myth of Saving Money in Insurance, Buying Online and using a Broker.

Every day we are inundated with emails and ads from various Insurance companies and Web Aggregator sites that promise to save us big money.  How true are these claims? Do you really save money and is buying online any cheaper than buying from an agent.

First things that one should know is that before an Insurer can sell a product in the market the insurer must file the product with the IRDA, the regulator. In the filling it must specify the pricing for the product. Once the pricing is approved the insurer must stick to that pricing formula. It cannot give a discount to one distributor over another.  For most products that are sold thru multiple channels like Direct from Insurer Online, Web Aggregators and offline distributors like agents and brokers, the price is the same irrespective of where you buy from.

What online comparison sites offer is a price and feature comparison between products of multiple companies. It helps you decide which product is best suited to you. But once you have decided on a product, then the price is the same no matter where you buy from. In this scenario where you buy from is more a matter of convenience and comfort. In cases where the comparison sites offer you a chance to buy polices instantly, you may want to opt for that as it is more convenient.

Are there any instances where you may still want to buy from a Distributor? The answer depends on your own comfort level with buying online. In case of life insurance policies you will need to submit documents for underwriting and may need to undergo a medical test.  If you are too busy to do these things on your own and follow up with the insurer, an agent or broker may be of help.  You don’t pay anything extra for taking their help and don’t save anything if you don’t.  One word of caution before you engage an agent. Make sure he/she is able to give you a choice of companies and products to choose from. Avoid people who always steer you to one product or refuse to give you a choice. Beginning of the year IRDA has allowed Brokers to start selling insurance online. We should start to see to brokers who supplement their physical sales force with online selling. Hopefully this will allow the customers to have best of both worlds.

Having said this there are a few products that are online only.  These are products can only be purchased Online either thru the Insurer directly or other Online distributors.  You cannot buy these products offline thru agents and brokers. Number of such products are growing and as the web sales catches up, you can expect more of such products.

Finally my advice to the customers is to compare insurance policies before buying.  Depending on your comfort level buy online or go thru broker. Better yet look for brokers who have online presence and buy from their site. Should you need manual assistance you can always call upon them for service.

Policylitmus

Stuck with Expensive Term Life Plans. Here is what to do.

Over the Last few Years, you might have seen a number of Insurers come up with very attractive life Insurance plans. The rates have plummeted and Term life Insurance has become very cheap. The question arises for people who are struck in expensive Term Life plans. How do they take advantage of these plans?  If you have bought one of these expensive plans and pay a regular premium they read on.

Let’s say for that you have purchased one of the old fashioned from one of these companies when you were 30 with a policy term of 25 years and for Rs 1 crore Sum Assured.

The premiums that you would pay is something like this:

Insurer	Policy Name	Premium
LIC	Jeevan Amulya II	Rs 22,022
Max Life	Platinum Protect	Rs 21,123
Aviva	Aviva Life Shield Platinum	Rs 14,424

Let’s Say you are now 35. If you are to buy Term Life Insurance now. The rates for 20 year term and 1cr Sum Insured will look something like this.

Insurer/Policy	Claims Payment Record[1]	Annual Premium(With ST)
Reliance(Online Term)	Rejects 7.54% of all claims , Settles 90.00% of claims in 30 days	Rs 9,455
Max Life(Online Term)	Rejects 5.75% of all claims , Settles 80.00% of claims in 30 days	Rs 9,775
Bharti AXA (e-Protect)	Rejects 9.98% of all claims , Settles 90.00% of claims in 30 days	Rs 10,449
BSLI(Easy Protect)	Rejects 13.00% of all claims , Settles 83.00% of claims in 30 days	11,179
TATA-AIA (i-Raksha)	Rejects 12.19% of all claims , Settles 84.00% of claims in 30 days	10,000
Aegon (i-Term)	Rejects 33.49% of all claims , Settles 59.00% of claims in 30 days	10,000

If you have a regular payment term policy then you may consider a switch by simply buying the new policy and stop payment of premium on the old one thereby lapsing that policy. Please note that if you have a single pay option or a limited pay option then, a switch will not make much sense as you have already paid a substantial part of your premium already.

There is one other downside that you should be aware of. If there is a claim on a life policy within two years of purchase then the claim attracts more scrutiny. This is not to say that claim will get rejected but more proof may be required from your side. Also don’t just go by premiums looks at the track record of the Insurer in paying claims specially ones that are less than two years old.

It would be good if Insurers offer to move the customers to their newer products but that won’t happens.  So the customer should look out for a better deal.

PolicyLitmus

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[1] Based on Public disclosures from FY 2011 – 2013 wherever available.