Why are Surrender Values for life Insurance So Low

Background: 

If you have ever surrendered a policy, you would have been shocked at the meager amount you received. It would have been much lesser than the amounts paid by you. Let us try and explain why this was so.  

Insurance is a long term contract. Your obligation is to pay the premium on a regular basis. The insurer is obliged to provide cover against the insured event. Contracts can be terminated by either party usually by paying a penalty. Insurers rarely terminate a contract unless the policyholder has committed a breach of his obligations. In rare cases if an insurer goes out of business or winds up his business he may opt to pre-maturely terminate the policy. On the other hand, if you voluntarily terminate the contract before you pay all the premiums, and intimate the company that you are not going to continue, and seek a refund of premium, you have indicated a desire to surrender the policy. The entire premium is almost never refunded. The difference is the penalty for early termination and is called the surrender charge. These charges can be quite steep and is the reason why surrender values are so low.  

Insurance contracts can range from a few days to many years. As a general rule: 

• The shorter the contract the lesser the chances of getting any refund via surrender. 
• Pure risk policies have no surrender values (i.e. entire premiums paid is confiscated). 
• Indemnity policies have little or no surrender value. 
• The longer the duration of the policy, the greater the surrender value the policyholder will get.  

In India long term contracts are usually life insurance contracts and surrender is a provision in most of these provided they are savings policies. Pure Term policies have no surrender value. 

So why is Surrender Value Low? 

Unlike other products and services insurance is bought in installments: however the insurer is fully liable from day 1. Further, insurers spend a lot of money in the initial years for acquiring the policy, pay large distribution expenses and keep aside reserves for claims. These amounts are recovered by them over a period of time from the subsequent premiums paid by the policyholder. Thus if a policyholder breaks the contract by surrendering, the insurer will remain out-of-pocket. These are the amounts recovered by the insurer as surrender charge. 

We are not debating if the charges are justified or can be reduced. The fact is that surrender charges will always exist. Our advice is that one should always aim to continue a contract till the stipulated date. A roundabout way of minimizing loss is by splitting the policy at purchase such that the entire policy need not be surrendered if there is an urgent need for money. Insurers try and restrict this by offering rebates if the premium is large enough. As always, you can count on us to help you solve any questions you have on this issue. 

We at www.policylitmus.com try to offer the best possible advice and options for customers of insurance. Visit our website to find out more. 

Insurance Application Forms: The Truth, the Whole Truth and Nothing but the Truth

I like to read what I sign. So, when my agent asked me to put my signature next to the “x” on a printed form while buying a life insurance policy, I balked. I wanted to fill it up myself, I said.

The first thing that struck me was that the form ran into 5 pages of really small font. After the usual stuff regarding my name and address and phone number, I entered tortuous territory. My height (umm…5 feet 11?), my weight (78 according to the weighing machine in my gym, 75 according to what I tell my friends, 80 is what it really is), my chest size in centimetres (no clue), waist size in centimetres (10 centimetres more than what I would like it to be) and so on.

Still more difficult questions were coming.

No one seems to have told the insurance company that I do not understand their language. They use words that have no meaning for me. For example, have I ever lapsed a policy? What on earth is a lapsed policy? I could not find an explanation, so I said “no”. Have I ever been declined insurance? Wait a minute: I am paying money to you, what is going on? They also wanted to know if I will bungee jump, join a circus as a trapeze artist, drive a race car in my spare time, or jump off a mountain without wings? Most assuredly not I said. Do I suffer from a 100 diseases that I had never heard of? I travel to work by the Mumbai local train and that qualifies me as fit for the Olympics. 

Even if I did I would not know it, and I calmly answered in the negative. Do I drink (alcohol) or smoke (cigarettes, beedis, cigars), or chew (tobacco, gutkha)? Do I drug myself senseless? Have I ever seen a doctor? (I wish I had never).Do I have all my teeth? The only thing they did not ask me was if I kicked the neighbour’s cat on a daily basis. The last page was 30 lines of fine print that assured me that if I ever mentioned anything that was untrue, the most horrible consequences would visit me.

Most of us do not go through this exercise. We just sign next to the “x” and our agent fills up the form. When we get the policy, we dutifully file it, again without reading any of it.

What is it with insurance application forms that make them complicated and unfillable? Well insurance contracts are unequal in nature with the company knowing far less about you than you know about the company. Hence the company needs to know as much detail as it can. A word of warning to the wise: it is in our interest to fill up the form as truthfully as possible. Claims are settled based on the answers filled out.

Fine print and jargon are second nature to an insurance company because they need to protect themselves against fraud. Maybe they need to remember that most customers are honest and processes must be designed to help the good guys.

But you can trust www.policylitmus.com to make things clear to the insurance buying public. No fine print, just crystal clear unbiased information. Compare over 1000 policies and 50 insurance companies, without having to reveal your contact details. 

Should you include your parents in your health Policy?

Often I am asked by young professionals if they can include their parents in their health policies. They often are specifically looking for Floater policies that allow parents to be included in the policy. My short answer to them is don’t do it. Let me explain why.

Your health needs are very different from your parents.

Parents who are approaching retirement age have a much higher propensity to need medical intervention compared to a thirty or forty year old. They are better off having a dedicated amount for their own treatment rather than share it with the rest of the family members. Conversely your other family members run the risk of not having enough money left for their treatment. The ideal policy for a family with the eldest member in the forties is a family floater while for people above the age of 50, the best option is an individual policy.

Not financially prudent

In floater policies, the premium depends upon the age of the oldest member. All members attract a rate that is based on the age of the oldest member. When a member is above fifty year of age then this inflates the premium of everyone in the policy.  You are also likely to need a much higher sum insured if you include your parents in your policy. The best option is to buy a separate individual policy for them. The amount of premium that you would pay by separating your needs into two policies would in most cases be less than one single policy.

In conclusion I would say that the most important thing is to ensure proper medical cover for your near and dear ones. A single policy may often not fit the needs of both. The best course of action is to look for a floater policy for you, your spouse and children. For your parents look for individual policy where each parent has their own sum insured.

This article is written by https://www.policylitmus.com. PolicyLitmus provides a comparison of over 1000 insurance plans from 51 insurers and helps you protect your life, health and property.

About Policylitmus

Why Insure Cars when People Cause Accidents

The Nut behind the Wheel:

Automobiles do not cause accidents, drivers do. This is an elementary fact. I have yet to see a car run off by itself and kill people. Yet in India we insure the car. Anyone can drive it. Let me repeat that: an insurance company will pay for damages irrespective of who has driven the car - young, old, infirm, trained, or untrained - so long as he holds a valid licence. Does that sound strange?

True, no matter who is driving, a car can fail temporarily because of bad brakes or terrible weather or bad road conditions. In each of these cases is it not a fact that a more experienced driver stands a better chance at bringing the car safely to a halt?

India is not known for great driving quality. Licenses are issued to whoever has two legs and is not a chicken. Road discipline is sorely lacking both in pedestrians and drivers with each blaming the other and together blaming overcrowding. We all expect the policeman and the government to regulate traffic and road use. While the policeman does his best under the societal conditions we live in, the government is hesitant to raise fines because it will only serve to increase corruption. It is a universal truth that without strong deterrent action, societal behaviour cannot be changed, yet we are unable to implement such mechanisms for want of will and resources.

We can Change:

Driving in India is a risky business: pedestrians are either quick or dead and a driver is either quick or left behind. Education and training have not been able to change our dare devil approach to road safety norms. Financial penalties are either measly or just not enforced. However, there is a solution that can have a deep impact on driving habits and that is by creating a monetary disincentive for unsafe driving using motor insurance.

Motor insurance premiums currently do cover a combination of non-driving damage risks and driving-caused damage risks.  India must get around to charging insurance premiums by also including driver skills. Driving skill must get adequate weightage. Why is driving skill so important? A tree can fall on a car, or it can get stolen. These are non-driving related risks. It does make sense to classify a car based on its intrinsic value and determine premium for such non-driving risks. However a major portion of premium is towards “own damage”: used to cover driver caused damage. Driving skill has a major impact on “own damage” risk.

Most accidents are caused by inexperience, either due to young age or the fact that the license owner, while not young, may be new to driving. Our case is that insurance premiums must reflect this reality. This will mean that young drivers will pay a higher premium. Young drivers remain a major danger on the road, to themselves, their passengers and other road users, with study after study showing that young people are far more likely to be involved in a crash than older drivers. Inexperience, youthful bravado, sheer recklessness and alcohol can all play a part in these accidents. This kind of segregation will introduce caution, and in India this will be a boon because as of now issuance of a driver’s license actually means that the person can practice his driving on the road putting the lives of countless pedestrians at risk. The corollary is that experienced and safer drivers will pay less.  Each insurance policy on the car must be associated with a specifically identified driver or drivers. The driving license can be the unique identifier. Since no-claim-bonuses will be tagged to the named driver, each driver will be more careful in his driving habits. Consistently unsafe drivers will end up paying extremely high premiums or even become incapable of purchasing insurance, forcing change in their habits. Just as companies share claims experience amongst them, they can share driving characteristics amongst themselves to maintain authenticity of data.

Let us Do it:

There is no reason to exclude commercial vehicles from this philosophy. Why have we not moved to this regime is a question that needs to be asked. Reasons are partly historical and partly because insurance companies are loathe to change. We believe that giving an insignificant discount if an applicant is part of an automobile association is too cosmetic. Some companies ask for educational qualifications and offer some discounts. These efforts are too small and do not address the real issue of incompetent drivers. We believe that by moving to the new regime as suggested, motor insurance companies will also be fulfilling their social responsibilities.

Life Insurance Bonus

Life Insurance policies are of 2 types:

Pure Protection: These policies only cover mortality risk, are usually for a specific term of years, pay out the Sum Assured on death and will not refund premiums already paid if the policyholder survives the policy duration. Term insurance plans are the best example.

Savings Plans: These plans have an element of saving in addition to covering mortality risk. Endowment and Money Back are 2 examples of savings plans.

On a basic level, out of the premium collected by the insurance company under savings policies one portion is allocated to covering mortality risk, another portion is allocated to paying commission to distributors and managing the expenses of the company and the rest of it is invested on behalf of the policyholder. 

At claim (maturity or death), the Sum Assured and the “returns” are paid out. The Sum Assured, which is a pre-determined amount, is always guaranteed.

The returns generated by the company are proportionately allocated to each policy. Such returns may either be:

1.       Guaranteed in advance at policy purchase and is allocated to the policy account at the promised interval. Guarantees usually specify the rate at which payment will be made, the method of calculation and the periodicity of payout. The usual terminology used is “Guaranteed Addition”. Another type of guaranteed amount includes Return of Premium. Under these policies, called the Term Return of Premium (TROP) or simply Return of Premium (ROP), the insurance company will cover risk for a certain period of time and then return all or some of the premiums paid either with or without interest. It is common for companies to highlight the fact that a guarantee is offered. Policies with guarantees promised in advance are simpler to understand.

2.       Non-guaranteed returns are allocated to the policy on a periodic basis – usually annually. There are several types of non-guaranteed “returns”.

1.       Reversionary Bonus: The insurance company generates a return on the policyholder’s funds and decides to allocate a certain portion of the return to the policyholders in the pool. This is called reversionary bonus. Some of the common features of a bonus are:

a.       Bonuses are declared retrospectively and allocated retrospectively.

b.      Bonus rates are not known in advance and amount declared will depend on the investment experience of the company.

c.       Once bonus is allocated to a policy, it is almost always guaranteed to be paid out. What this means is that while the exact amount cannot be guaranteed and depends on the company’s performance and inclination to allocate, once allocated it is guaranteed to  be paid out.

d.      Once allocated, the amount so allocated is called vested bonus.

e.      Vested bonuses are of 2 types:

·         Simple Reversionary: The amount of bonus allocated is always a percentage of the original maturity Sum Assured.

·         Compound Reversionary: The amount of bonus allocated to a policy is added to the maturity Sum Assured and bonus is calculated as a percentage of the maturity Sum Assured and any bonus already vested.

f.        Reversionary Bonuses are usually paid out at the end of the policy term.

Let us take an example:

Maturity Sum Assured	Rs. 100,000
Year 1 Bonus Declared	4%
Year2 Bonus Declared	5%

Total Bonus under Simple Reversionary Method	Total Bonus under Compound Reversionary Method
Year 1:  (100,000X 4%) =  4000	Year 1:  (100,000X 4%) =  4000
Year 2: 4000 + (100,000X 5%) =  9000	Year 2: 4,000 + (104,000X 5%) = 9200

Bonuses declared under Compound Reversionary mechanisms are usually lower in absolute numbers than Simple Reversionary methods. Sometimes insurance companies declare reversionary bonuses other than as percentage. The most popular is as a value against Rs. 1000 Maturity Sum Assured. For example, 4% will be represented as 40/1000 Sum Assured. This larger number serves to create a sense of assurance in policyholders.

Some companies use the term cash bonus. These are usually simple reversionary in nature and by implication is paid out periodically – usually annually.

2. Terminal Bonus: Some bonuses are only declared, allocated and paid out towards the end of the policy term. These are Terminal Bonuses or (as LIC calls it) Final Additional Bonus. Like reversionary bonus, terminal bonus is calculated based on the company’s experience and is non-guaranteed. Terminal bonuses will not be paid out if the policy is voluntarily ended by the policy holder as when he lapses it or surrenders it.

3. Loyalty Additions: These are payments are calculated in a manner similar to reversionary bonuses with the exact amounts not known in advance. As the term implies, this kind of bonus is paid out only if the policy holder stays with the company for the duration specified.  

In a strict sense, rates of bonus allocated in the past do not guarantee that the same rates will continue in the future. However companies do try and maintain allocated bonus rates. Savings policies do not provide great returns but are steady assets, remaining hidden in one’s portfolio till needed. Coupled with any applicable tax advantage, these policies can serve as a good means to diversify financial risk.

You can now compare savings type insurance policies on www.policylitmus.com and take the most appropriate decision to meet your financial needs.

The Wise Buy Insurance: The Not so Wise Buy Policies

We all know the local insurance agent whom we try and avoid. His sole aim in life is to tell you of a new “scheme” that will bring us eternal happiness. We avoid him or run away from him or do not pick up his calls, yet, somehow, we do end up buying from him. The primary weapon in his arsenal is persistence. You will have never encountered another human being who can take rejection so well and still keep up the effort. He is unfazed by the word “no”, will wait patiently for times to change and still pursue his profession with the enthusiasm of the convert.

His reasons are many: the latest contest, his target achievements, or the upcoming tax season. The net result: we end up with several insurance policies that we struggle to manage. Our portfolio will have small policies, unnecessary policies, lapsed policies and unknown policies. A large proportion amongst us does not even know what is in our portfolio. This is not economic protection but favours done. We have not purchased insurance, we have purchased policies.

What is the difference? Insurance is the creation of an asset that will substitute economic value. The purchase of insurance is a reasoned out process based on need, right fit and price. Insurance is valuable only if it can be encashed at the time of need. Imagine buying from a company that rejects a large percentage of claims on flimsy reasons. Not only are paid premiums wasted, the objective of the purchase is defeated. Most of us are under insured, or have purchased the wrong type of policy.

Truth be told, very little can be done about what has already happened. In most cases surrender of older policies will produce insignificant returns. General insurance policies like health insurance or motor insurance will fetch you nothing on surrender. Our recommendation is that for your life insurance requirements, make a review and ensure adequate coverage. The product you buy should be the one that gives you the greatest confidence regarding reliability of claim payment. For your Health, Motor and Home protection requirements review your portfolio today and take charge. Health policies are portable and can be changed without trouble. Motor policies protect your No-Claim-Bonus (NCB).

Before you start changing your portfolio, compare on www.policylitmus.com to find out the product that fits you the best. Choose not only on price but on claims performance  and customer satisfaction parameters without surrendering your privacy.

Jan Dhan Yogana can be a game Changer

In his address to the nation on the 68 Independence Day Prime Minister, Narendra Modi, announced the launch of an ambitious financial inclusion program called the Jan Dhan Yogana. Under this plan every household in rural India will have access to bank account and Rupay debit card with Rs. 1 lakh personal accident insurance cover. About 60% of the Indian population doesn’t have access to any form of banking services. Also envisages under the plan is Rs. 5000 overdraft facility for each household. While the prime minister has set no deadlines, the talk in the knowledgeable circles is that the Government intends to complete this by 2016.

Challenging but not un-doable

While this is a challenging task it is by no means un-dobale. Mr. Modi gave the example of almost every household having a mobile but not a bank account. If we think back to pre-liberalization days the tele density in the country about 1%. Today it is over 80%. What financial institutions like banks and insurers need to do is to replicate the same in banking and Insurance, something that is more existential than a mobile.  All indications are that government is doing its part to help. There are strong indications that both the providers and distributors will have incentives to make this scheme a success. All of the direct cash transfers would be thru these accounts, thus creating demand for this service in the rural areas. Banks are to get a fixed percentage (about 2%) of the new deposits as commission.  It also being said that a monthly salary would be paid to the last mile distributor who enrols and services these accounts. In past retaining the banking correspondents in the rural areas have been a great challenge.

The rural population engaged mainly in manual labour is highly vulnerable to workplace accidents. Death, permanent or temporary disability to earning members can bring quite a lot of hardship to the family. By including a Personal accident cover the scheme will provide much needed protection to these families.

 Need to build on this.

While this is a good basic scheme, the providers like banks and Insurers need to go beyond what is stated in the scheme and build on it to create a robust financial network in the rural areas.  The providers would need products that cater to seasonal income patterns prevalent among the targeted people.  The government need to think about the safety aspects of moving cash in rural and remote areas.  Governments Health Insurance plans like RSBY should be linked to this initiative to avoid duplication and cost optimization.

While the potential is immense, only time will tell if this scheme would go the same way as its predecessors or it will bring a revolution like the one this country has seen in the telecom space. Let’s hope for the later.

Best Life Insurance Companies in India in 2014

Best Life Insurance Companies in India in 2014.

Every month over one lakh searches are done in India on the Best Insurance companies in India. How do we define the Best Insurance Company? You may say that what is best for one person may not be the best for another. However there are some factors all of us can agree on that we look for in Insurance companies. We would all want our insurance companies to:

1.       Settle a high percentage of claims

2.       Have few complaints

3.       Have customers who come back to pay renewal commissions

1.    What percentages of claims do Insurers Reject?

The reason a customer pays premium is to ensure that the insurer is there for his/her dependents when he is no longer around. Acceptance of claims is the single most critical element of an insurer’s performance.

Here is the Data on claims rejection by Insurers.

Insurer	Percentage of Claims Accepted in FY 2013-14
	Overall	Within two years of taking Policy	Beyond 2 Years of taking Policy
LIC of India	98.9%	99.7%	99.2%
HDFC Standard Life	96.3%	96.4%	99.9%
ICICI Prudential Life	94.6%	94.9%	99.7%
IDBI Federal	94.4%	94.7%	99.7%
Max Life	93.9%	94.6%	99.3%
Bajaj Allianz Life	93.4%	94.1%	99.3%
SBI Life	93.2%	93.8%	99.4%
Sahara	93.1%	95.0%	98.1%
TATA AIA Life	92.5%	93.9%	98.6%
Star Union Daiichi	92.3%	92.4%	99.9%
Kotak Mahindra	92.2%	92.9%	99.3%
PNB Met Life	90.4%	90.5%	99.9%
Bharti AXA Life	90.0%	91.4%	98.6%
Birla Sun Life	89.9%	90.5%	99.5%
Exide Life	89.9%	90.6%	99.3%
Canara HSBC	89.1%	91.9%	97.2%
Reliance Life	88.1%	91.3%	96.8%
Aviva	84.1%	87.5%	96.6%
Future Generali Life	83.6%	84.2%	99.5%
AEGON Religare	81.0%	82.0%	99.0%
Shriram Life	79.9%	79.8%	100%
Edelweiss Tokio Life	76.2%	76.2%	100%
DLF Pramerica	61.7%	63.4%	98.3%
India First Life	61.3%	63.3%	97.8%

While an argument can be made that most of the rejections are within 2 years and may be a result of fraud, it still begs the question about the quality of controls (or the lack of it) that insurers have for acquiring new business. Ideally the Insurer should have an acceptance ratio in the high nineties. For the most part a customer should be fine with an insurer who acceptance is in the 90s.

2.    Do customers continue to pay their renewal premiums?

First thing that you may want to know is how many customers continue to pay their premiums after the first year.  If the customers are not paying renewals then it means that either they have been sold a policy that is not fit for purpose or it is a forced sale.Here are the results of the Financial Year ending March 2014

Insurer	Percentage Paying Premium into third Year
HDFC Standard Life	71%
Max Life	66%
ICICI Prudential Life	68%
Kotak Mahindra	77%
Birla Sun Life	60%
TATA AIA Life	60%
SBI Life	65%
Exide Life	57%
Bajaj Allianz Life	48%
PNB Met Life	47%
Reliance Life	58%
Aviva	52%
Sahara	73%
Shriram Life	82%
Bharti AXA Life	54%
Future Generali Life	33%
IDBI Federal	76%
Canara HSBC	86%
AEGON Religare	48%
DLF Pramerica	44%
Star Union Daiichi	44%
India First Life	56%
Edelweiss Tokio Life	45%
LIC of India	71%

Ideally you would want the insurance company to be able to retain over 80% of its customers into the third year.  There are only two insurers that meet this benchmark. Worryingly more than one in four insurers have a retention rate of less than 50%. Clearly there is a problem in the Industry where customers are often sold products that do not fit their needs or that they do not want. If a significant proportion of the customers do not like the products they have been sold , the chances are that neither will you.

3.    How many Complaints do the Insurers have?

Complaints are an accepted parameter of service performance of any industry and the Insurance industry is no exception.  Here is the data on Sales complaints per 10000 policies sold.

Insurer	Sales Complaints per 10000 Policies	Percentage complaints
LIC of India	20	0.2%
Shriram Life	21	0.2%
India First Life	33	0.3%
Edelweiss Tokio Life	69	0.7%
IDBI Federal	78	0.8%
Star Union Daiichi	103	1.0%
SBI Life	141	1.4%
PNB Met Life	218	2.2%
DLF Pramerica	223	2.2%
ICICI Prudential Life	246	2.5%
Exide Life	335	3.4%
Max Life	365	3.7%
Kotak Mahindra	382	3.8%
Aviva	509	5.1%
Reliance Life	523	5.2%
HDFC Standard Life	594	5.9%
TATA AIA Life	659	6.6%
Bharti AXA Life	662	6.6%
Birla Sun Life	740	7.4%
Canara HSBC	838	8.4%
AEGON Religare	868	8.7%
Bajaj Allianz Life	1150	11.5%
Future Generali Life	1434	14.3%

While the top 5 Insurers in this category fare quite well there are a few with a rate of complaints higher than 10%.

Hope this data helps you identify Insurers that you find acceptable. Once you have found companies that meet your criteria then look at premiums and select the best premium from the companies in your consideration set. You can get all the details of the Best Life Insurance Companies in India at www.policylitmus.com.