Review your Insurance portfolio Regularly

A stitch in time saves time and money and heartache

Many of us have insurance policies. Would it surprise you if I told you that 94% of us sign an insurance application form at the “x” mark and depend on our agent to fill up the details? If this is the status at signing-up, would it be any different when the contract is received? Have you been guilty of handing over a cheque to your agent with the amount blank or the name of the company blank? Do not worry: you are in the majority. It is surprising that we will argue with our vegetable vendor for over charging us by a few rupees but will ignore crucial steps with regards to our insurance policy.

India has many million insurance policy holders. I can confidently say that those who have read it from cover to cover number a handful. Hardly any of us have read the documents. Almost none of us know what is in them. We depend on our agents to tell us if any amounts are due. If it were not for automatic credits into our accounts of any survival benefits, we probably would not even track those! We also know that insurance documents are complex pieces of legal jargon, loaded in favour of the insurance company. But this does not mean that we abdicate our rights to know what is in these documents. Insurance companies are expected to do a due diligence when they underwrite a new case, yet in their hurry they may tend to overlook critical documentation: however what most people do not know is that a far greater due diligence is done at claims stage before actual payouts happen. Many are the claims that are stuck because the policyholder did not perform basic actions either due to lack of knowledge or because of carelessness. For example, general insurance claims have to be reported within a defined time-frame, and unnecessary correspondence can be avoided over delayed reporting of claims. Few know that insurance company loans require payment of interest: Insurance maturities amounts can be severely curtailed/forfeited because interest on loans availed on the policy were never repaid. A few of us are not exactly sure when our policies renew and if it not were for those pestering calls we may forget that date as well. Make a resolution today: Review your insurance portfolio.

Check when your policy expires

Check when your policy expires. If it is a health, home or motor policy, this will most probably be annual in nature. Check if your agent/distributor is still around and speak to him. If online options are available, and you are comfortable transacting online, check if online renewals are available. If it is a life insurance policy, check if any premiums are due and on what date they are due. As in general insurance policies, most life companies allow payment of renewal premium online. Your agent or distributor, if he is still around, can also be contacted. If your policy has lapsed, check whether you want to revive it. It is generally wiser to revive, because surrender values are usually low. Contact a professional for help.

Are your policy and its details up to date?

Check the details of your policy. Has your address changed? If so get it updated in the insurer’s records. Most will require proof of address, hence keep documentation ready. Are any survival payments due and/or have you missed any? While in most cases insurers will have records of missed payouts, it is better to be on the safer side and keep track. Check if nomination details are updated. There have been cases where nomination details are left as it were recorded in the original policy (usually in favour of the mother or father) and at the time of claim they may have predeceased the life assured, resulting in complex legal documentation to prove title. Has the policy been assigned, say for a housing loan, and if so have all loans been repaid? Initiate proceedings for reassignment, to bring the policy back in your name.

Read the T&C

Read the policy document and see what is covered and more importantly what is not covered. General insurance policies will have plenty of conditions and clauses that limit your claim payouts. It is better to be aware of them. Some of them may have benefits in your favour: for example road side assistance in case of a vehicle breakdown or ambulance benefits in case of hospitalisation.

While it is not possible to list down all the factors that may impact you, it is critical to know your rights and responsibilities with respect to your insurance policy. It all starts with reviewing your portfolio.

Five facts about Age and Life Insurance Premiums and one Universal Need

Everyone knows that life insurance premiums depend on age. The older you are the higher your premium. This is because the moment you are born you start to die. So how do companies charge the premium and still make money? Lots of people die and lots of them have policies: so how do insurance companies make money (for the record: only smart companies make money)? And why do different companies have different rates for the same age?  Let us reveal some secrets.

Good luck of many pays for the bad luck of few.

Insurance companies can predict how many will die, not who will die. In theory only God can predict who will die. But insurance companies can predict with remarkable accuracy that given a group of individuals with similar profiles, how many will die. No magic here: they have accumulated statistics from the 1700s. Yes, they have been collecting records and data for 400 years, so you can expect them to be fairly accurate. So now it is simple: collect premium from lots of people, set aside some money to pay claims for the chaps who will kick the bucket, spend some on salaries and stuff and retain the rest as profit. Seriously, it is as mundane as that.

Women live longer than Men.

Women are better than men; up to a point that is. Women are better risks than men and insurance is probably the only business where women are treated as better customers and charged less. Women live longer than men provided they have the same opportunities in nutrition and health and education, unless their lives are tragically ended due to cultural shocks like burning them for dowry. Thus for the same age women will pay a lower premium than men.

Accident and Mortality Rates Shoots up in the twenties

Age makes men foolish and insurance companies know that. Women would argue that age has nothing to do with being foolish as far as men are concerned. Neither are we are not talking about the second childhood where some men behave as if they have to make up for the lost years. As far as theory goes, and common sense supports this theory, a man who is older will die earlier.  But Insurance companies are keen observers of human behaviour: their business depends on it. Heard of the accident hump? In an otherwise predictable mortality curve, the accident hump happens between the ages of 18 and 28 when boys discover motorcycles (and girls). Premium rates will reflect the accident hump pretty actively because death rates in these ages due to accident are fairly higher than that of other ages.

Young Subsidize the Old

The younger you subsidises the older you. Insurance companies are pioneers of the welfare system. Most of us are aware that we are charged the same premium throughout our policy duration. This flies in the face of logic that the older we are, the higher the premium we should be paying. This happens because the insurance company levels the premium to prevent your exiting the system in future. At the age of 50 you would be paying 5 times of what you would be paying at the age of 18. The chances of your exit are higher if your premium keeps on rising. The insurance company charges an appropriate discounting factor and levels your premium: till a certain age you are actually paying more than what you should be paying based on your current age and thereafter you will be paying a little less than what you should be paying based on your current age.

Cheaper premiums do not mean better products.

Insurance companies have expenses, so in theory every company’s premiums must reflect money set aside for claims, adding of expenses and settling for a reasonable profit. Premiums vary on the fact that some companies have fatter expenses, or may want a higher profit margin. Some companies may keep aside more money for claims, because they have a worse experience than other companies and are more prudent. None of this is very transparent to an ordinary customer and as a customer we can do our due diligence by logging on to a good Insurance comparison site and doing our research. Check for how soon they pay claims and how many claims are paid as a percentage of total claims. You may also check for customer service levels.

Immutable Need

Nobody can predict death. If you do not have term insurance, buy a term plan now. If you have already bought one, check if the amount of cover is 100 times your current monthly income. If there is a shortfall fill that up. Before your next birthday, that is.

Should you take a Loan against an Insurance Policy

Is it a good idea to raise a loan against your insurance policy? The answer can be a yes or a no, depending on circumstances.

Not all Policies Offer loans

First things first: Not all policies can be used to raise loan. General insurance policies have no provision for loan because by nature these are indemnity policies. This means that these kinds of policies have no current value: only on claim will they acquire a value that is equal to the claim paid out. Life insurance policies can be used to raise a loan. The amount of loan is determined by the current surrender value of the policy. Surrender value is the value one will get from the insurance company if he decides to voluntarily terminate the policy. Because surrender values are the function of the number of premiums paid, generally older policies will have accumulated greater surrender value as compared to newer policies. By extension, this means that the proportion of loan on older policies will be higher than on newer policies. There are other factors like the duration of the policy contract that will impact the amount of surrender value, but for general purposes it may be assumed that under similar policies, the older the policy, the greater the surrender value. Term insurance policies that pay out only on death are policies that have no surrender value. Therefore no loans are possible on term policies.

However, not all life insurance policies can be used for loan. New policies may not have accumulated enough surrender value to generate a loan. Some policies may have generated a surrender value, but the quantum may not be enough to cross company guidelines on minimum value that can be paid out. Some policies by nature of contract may not grant loan. Typical amongst these are policies that offer a survival benefit in terms of periodic payouts.

Insurer may be Less Insistent on regular EMI

Loans can be raised from the insurance company itself or from an external lending agency like a bank. In both cases the quantum of loan will be decided by the current surrender value and in both cases the policy will have to be assigned to the lender. By executing an assignment, one transfers the ownership to the lender, who then has first rights over the proceeds of the policy. In both cases, interest will have to be paid to service the loan. By and large insurers charge a lower rate than commercial lenders; however this may not be true in all cases. While the external commercial lender will insist on payment of interest, the insurer may not be particularly insistent. The reason for this is that since surrender value is consistently rising on payment of every premium, the insurer is confident that his loan is recoverable along with outstanding interest. If premium payment stops, the insurer will calculate the outstanding loan and interest and if it exceeds the surrender value, he will forfeit policy proceeds.

With Insurance loans you take upon yourself a higher quantum of Risk

By now it should be obvious that loans may be availed only if the need is critical enough. Any loan reduces the overall risk cover, because the insurer at claim payout will reduce the claim by the amount of loan. The choice of the lender will be decided by interest rates and other factors, however it is obvious that loans from the insurer are more convenient to process and may have a faster turnaround time. Ensure that interest is regularly paid to prevent accumulation of interest amounts and prevent a possible forfeiture of policy proceeds.