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What should be your check points before buying insurance? - Outside View by PersonalFN

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What should be your check points before buying insurance?
Nov 30, 2013

Insurance in its purest sense is refers to indemnifying risk. Thus by having an adequate insurance cover you can protect against a financial loss / uncertainty which includes the risk of illness, disability, damage to property, and the most important of all - one's demise. Having an adequate insurance cover enables you and / or your family to maintain the standard of living despite of any mishaps or unforeseen tragic events that could have broken you financially. But mind you, that does not mean that you should buy an insurance cover arbitrarily.

You see, many of us make a mistake of combining our insurance and investments needs. Also just because you are entitled to a tax benefit, does not mean you should fall for luring sale pitch of insurance agents (which makes them rich by earning a fat commission) but leaves you with a wrong investment decision.

Before you blindly hawk into buying a policy from any insurer there are a few things you must check about the insurance company:

  • Promoter's background: All of us check the goodwill of schools before taking admission for our children. We also analyse the reliability of companies while buying any consumer durables such as Air-Conditioner, Refrigerator etc. Similarly knowing the history / background of your insurer is of utmost importance, before you buy any insurance policy. Remember, the insurer indemnifies you against the risk, which you face, and hence assessing the promoter's background and their philosophy becomes very crucial. While planning your insurance, one wants to buy peace of mind, and not face the bother whether the insurance company would settle the claims or not. Hence, understanding the value systems of the company is important.

  • Number of years of existence: Well, it is always said that experience counts and in our opinion too it does! It would be prudent to go with season players (insurers) rather than the one who are relatively new entrants in the business of insurance. However in case you do choose any new entrant, then it becomes prudent to evaluate them. You must analyse the streams of other businesses operated by their promoters and their success rates along with ethics while operating such businesses.

  • Financial Background: Just having a fantastic value system and good number of years of existence, but not having the financial strength to back it, would not do any good when it comes to settling claims. What is required is a robust financial muscle, which will lead to better claim satisfaction. You don't require a toothless tiger. A well-established insurance company with a proven track record is in a better position to give you that extra bit of peace of mind.

    But then you would ask what parameters should one check in order to gauge the financial strength? Well, you may take help of some of the parameters mentioned below:

    • Claim Settlement Ratio (CSR): CSR will help you assess the percentage of claims settled, against the total claims lodged with the insurer. If you are looking for worry free nights and peace of mind it is very vital to check the CSR of the insurer. While doing this study, it also becomes imperative to know the claim settlement procedure, from your insurer or the insurance agents, and assess whether you are comfortable with the same. And it is important to note that your honesty also pays - one should not mention any mendacious information while filling in the form and disclose all the relevant information pertaining to you and your family. One may escape the underwriter's eye at the initial stage of getting the policy, but this would back fire on you while settling your claims, as the underwriter might put down his foot on some issues which do not satisfy the underwriting provisions of the insurer. So, a low CSR may not always reveal the financial weakness of the insurer.

    • Solvency Ratio: This ratio reveals the strength in the balance sheet of the insurance company and the capability of the insurance company to settle insurance claims. It takes into account the net worth and the reserves and surplus held by the insurer.

    • Profitability ratio: This ratio reveals whether the insurance company generates enough income for its stakeholders after meeting all the expenses (both operating as well as non-operating expenses). While profitability, may not appear as important as the claim settlement and solvency ratio, but it needs to be gauged to ensure the efficiency and effectiveness with which the insurance company is run. Remember, only when the business is profitable, the promoters will find prudence in continuing with the same.

  • Reading the devil in the fine print: Merely trusting, what your insurer or insurance agent says and signing (an insurance form) will not do much good to you in the long run. It is imperative that you read all the relevant insurance documents, rather than dumping them in some corner of your house or office. The devil in the fine can also roar a big "NO" during times of settling claims, as there may be several exclusions which may be a part of the policy which intend buying. Hence it is very important to read all the terms and conditions attached to the policy.
Also, you must keep in mind that in case you are buying an insurance policy from an agent then you must also be careful about which agent you choose. It is prudent to select an agent or broker who has a tie-ups with multiple insurance companies instead of only one particular company. This will give you access to various products from different insurers under one roof and also better co-ordination in terms of accessing the services of the broker. An ideal agent must have qualitative product knowledge and sufficient experience in the industry. A well-established agent is always preferred to get the advantage of both - right insurance planning and satisfactory after sale services.

PersonalFN is of the view that taking an insurance policy from any insurer or agent without checking for their suitability and claim settlement capability is as good as not taking any policy at all. If you don't wish to have sleepless nights and want to feel protected from financial losses and uncertainties in the true sense then it is extremely necessary to keep the above check points in mind before buying any insurance policy.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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