Friday, 19 August 2016

What if my insurance company goes bankrupt in India?

Every one of us might have bought the insurance from private companies. However, somewhere in our subconscious mind there remains number of questions like “What if the private insurance company goes bankrupt? What if the private insurance company does not entertain our claim on the unfortunate event of death of our loved ones? Or else we do not have a heart to accept the fact that the private companies are equally good as those of public insurance companies. 

If you are the one who have above questions running in your mind about selecting insurance from private companies then you have landed on the right page on internet.

Such questions create uncertainty in the attitude of investors.
Insurance in India is regulated by IRDA which has complete control over the insurance companies whether government owned or private. As per the guidelines of IRDA, in order to register the insurance company in India, Company has to be registered with IRDA with minimum investment of Rs 100 Crore for life Insurance. Apart from this, the company has to invest Rs 200 crore for reinsurance business.

Not only the capital requirement is considered by IRDA, but there is also a long procedure to get the license in order to start the insurance company. IRDA also keeps a close watch at the solvency ratio and the claim settlement ratio of the companies that is discussed in the next section of the article. 

Must Read : What, Why and Different Types of Term Insurance and different types of riders available in Insurance

All the products of insurance companies are also approved by IRDA. IRDA strictly follow these norms in order to build faith among the investors.The product can be brought into the market after the approval from IRDA. This stringent guidelines of IRDA helps you, as the company and the products of the private insurance company are launched properly.Also the agents also undergo the training of 100 hours from IRDA and thus are qualified and well trained.

Two most important factor while selecting an Insurance Company is keeping in mind the risk, the solvency ratio and claim settlement ratio(CSR) which are also available in the IRDA website. 

Let us first understand what is solvency ratio?

Solvency is defined as "The possession of assets in excess of liabilities; ability to pay one’s debts" 

Solvency Ratio” means the ratio of the amount of Available Solvency Margin to the amount of Required Solvency Margin.

Available Solvency Margin” means the excess of value of assets over the value of liabilities i.e premium written  

The solvency ratio is the only one measure, which informs us whether the company will stay solvent or not.
With the help of solvency ratio one can make sure that whether the company’s cash flow is sufficient to meet its short term as well as long-term liabilities. Hence, solvency ratio is the crucial component, which must be considered before the selection of the insurance company.Based on the solvency ratio the you can select the best insurance company. 

IRDA has prescribed solvency ratio of 1.5 for Insurance companies in India.

Must Read : Why Not To Purchase Term Insurance With A Return Of Premium Option? 

Let us simplify solvency ratio with an example 

Insurer A has a liability of Rs.1000 and arrives at a solvency margin of say Rs.1100. This means the required assets should be worth Rs.1100. But in order to provide a further cushion to this number, IRDA has prescribed a solvency ratio of 150% i.e 1.5, which means the insurer will need to maintain Rs.1500 instead of just Rs.1100.

Solvency Ratio is available in the annual report published on the IRDA website, click here 
Following table shows the quarterly solvency ratios of Insurance companies for every quarter for 2014-2015.
Solvency-Ratio-for-Insurance-Companies-for-F.Y.-2014-2015
Source IRDA 2014-2015 Annual Report
As per the above report DHFL Pramerica has the highest solvency ratio of 12.69, next is Bajaj Allianz and LIC has the lowest solvency ratio of 1.55.
LIC is government owned and in case of any downward movement in solvency ratio, Government of India (GOI) can infuse capital. The only worst scenario would be GOI going bankrupt like Greece for which chances are very very slim as Indian economic situation had been good even through the tough times of 2008-2009 recession.
In a Nutshell "Higher the solvency ratio indicates better company profile"

Must Read : Why Term Insurance is required till 60 years

Next is Claim Settlement Ratio 
The main purpose of the insurance will be beaten if the policyholder does not get the claim when required.
In that case, the claim settlement ratio is required and it can be explained as the total number of death claims settled by an insurance company.It is calculated by dividing the total number of death claims received by the total number of settled cases by the insurer.
Claim Settlement Ratio=Total Number of Death Claims /                                              Total number of cases settled


Say for example, the Reliance insurance gets the death claims around 1000 and it is capable of settling only 960 claims, then the claim settlement ratio of Reliance will be 96 percent. As the claim settlement ratio gets higher, the company becomes more favorable for the investors.

Source : www.mintwise.com
LIC of India has the best Claim Settlement Ratio (CSR) where as the next 6 are very close in terms of % and with better CSR
Combination of  Solvency Ratio + Claim Settlement Ratio is a must because if you look at solvency ratio of DHFL Pramerica is 12.69 where as CSR is only 57.19% which dissolves the whole purpose of buying an Insurance 

Must Read : How Much Insurance Do you Need

Verdict 

Yes it is safe to buy from a private insurance companies provided the policy which you are buying is cost effective.

I personally have bought 2 Term Insurance policy of 75 Lakhs each after comparing their quotation, selecting the cheapest one and after checking their Solvency Ratio and Claim Settlement Ratio 

This way i have mitigated the risk of Insurance company going bankrupt (chances are very very less due to stringent guidelines by IRDA) ,if this risk occurs , there would be other company around to settle me. The chances of both of them going bankrupt are almost negligible, what do you say ?

Do let me know your thoughts in comment section....


I also hope you enjoyed reading the article , it takes time to write articles, request you to please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left.

Who doesn't like a financial healthy life,In case if you want one, contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you


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How Much Insurance Do You Really Need
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Disclaimer  :-

The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.

Friday, 12 August 2016

Why Not To Purchase Term Insurance With A Return Of Premium Option?

One of the most common and purest forms of life insurance is Term Insurance, which is broadly available in the market. The term insurance plan is a scheme to cover life of a person and get an assured amount to nominee in case if any unforeseen even happens but before purchasing any kind of Insurance you should know how much insurance do you need. The premiums of Term Insurance are very less as compared to that of ULIP or an endowment policy. You can get your life secure for a cover of Rs 1 crore with a mere premium Rs 7000(It depends on your age,policy term etc).



However, the sum assured and the premiums of the scheme may differ from one insurer to another. With the help of term insurance plan you can invest your surplus in other investment class for wealth creation in long term.

Must Read : Why Real Estate is a dull Investment compared to mutual fund

You can select Policy Term for a period of 30-40 years depending on your age but i would suggest you should have term insurance policy only up to 60 years

Once the policy is matured then at the time of maturity of the policy, the insurer gives back the entire premium paid by the policyholder in Term Insurance with Return of Premium Option. But TROP gives very small internal rate of return (IRR) and you get the money in case if you survive the opted policy term.


This will be complicated for you to understand without the help of the example, let us go step by step in order to understand Why TROP is not useful


Following figure illustrates some of the renowned companies offering term insurance plan with return of premium. Different companies have different premium and plans.


There is huge difference of premium you pay for term insurance plan with a return of premium(TROP) and the pure term insurance.
Let us understand by considering an example 
Mr. Rajesh Singh,30 years old wanted to purchase a Term Insurance for 30 Year Term i.e thinking he would retire at 60 years. The insurance agent (agent can be offline or policy bazaar or anyone) gave him two options of the term insurance plan with a return of premium and other one of without the return of premium. 
Mr. Rajesh inquired about the difference between both and he found the difference below 




The sum assured of life is Rs 1 Crore with the annual premium of Rs 25000 in the case of term insurance plan with a return of premium and annual premium of Rs 10000 in case of term insurance plan without return of premium. 
Death benefits remains Rs 1 Crore in both the policy types. However, the maturity benefits will not remain same in both cases. 
If Mr Singh survives the policy term then he would get a his premium back of Rs 7.5 Lakhs (Rs 25000*30 years), whereas in case of without return of premium will give no benefit to the policyholder. 

Must Read : Best 3 Midcap Fund Churning Money for Investors

Mr. Singh after understanding the difference between both the policies was attracted towards the Term insurance plan with a return of premium. The agent also suggested him the policy with return of premium (As they always do for a need of higher commission and or may be with lack of knowledge)

Nevertheless, consider the same situation and have a look from other perspective. Say that Mr. Singh does not pay the rest of the Rs 15000 (Rs 25000-Rs 10000) and goes for the option of Pure Term insurance.Assuming Mr Singh being a risk averse person could invest that Rs 15000 annually in PPF account considering a rate of interest 8.10% percent for the 30 years. He would have got Rs 18,85,923 instead of Rs 7,50,000

(18,85,923= 15000*(1+8/100)^30), which is far more than the maturity benefit in TROP. He can earn more Rs 11,35,923 (Rs18,85,923-Rs7,50,000) by investing in PPF account.

Mr. Rajesh Singh can earn more as compare to this policy, when he will invest in the PPF account. However, we know that the safest and best way to generate the tax-free returns is by investing in the PPF accounts. 


Let us take a different scenarios where Mr. Rajesh Singh opted for another option like investing the rest of the amount in the diversified equity mutual fund through SIP. If he will deposit sum of Rs 15,000 per annum for 30 years at the compound annual growth rate of 12 percent then he will fetch the amount of Rs 40,69,389, which is really a big amount by the formula shown below. 


The profit earned by Mr. Rajesh Singh at the time of the maturity was Rs 33,19,389 (Rs 40,69,389- Rs 7,50,000).
 

Must Read : 9 Secrets to Choose Mediclaim Policy 

Now let us see the difference between PPF account and diversified equity mutual fund through SIP with the help of the table shown below 

In case if you are purchasing a term insurance with return of premium please keep in mind TROP is a TRAP

I hope i have addressed everything pertaining to Term Insurance with returns of premium, in case if you have any doubts or clarifications do let me know your thoughts via comments

I also hope you enjoyed reading the article , it takes time to write articles, request you to please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left.

Who doesn't like a financial healthy life,In case if you want one, contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you



Mutual Funds & Insurance Related Articles :-
Benefits of SIP

What is SWP in mutual Funds

9 Secrets to choose right mediclaim
How to Plan for your Child Education Planning
How to do Retirement Planning
Best 3 Large Cap Mutual Funds for SIP in 2016 
Best 3 Midcap Mutual Funds for SIP in 2016
Best ELSS Tax Savings Mutual Funds for SIP in 2016
Why you should not buy ULIP
How to Select Mutual Fund for Portfolio
Liquid Funds are better alternative than Savings Bank account
What is FMP in Mutual Funds
Complete Guide on Monthly Income Plans
Complete Guide on Credit Opportunities Fund
How to Save Tax using Equity Linked Savings Scheme
How to Budget Your Money
How Much Insurance Do You Really Need
Why Should you buy Term Insurance Upto 60 Years
5 Must Have Insurance Policies for Women


Disclaimer  :-

The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.