Term insurance remains the most straightforward form of life protection, yet choosing the right plan involves navigating through multiple life insurance companies in India, each claiming superior benefits and service. Most buyers rely on premium costs or brand recognition to make this decision. This approach misses critical metrics that determine whether your family will actually receive the coverage when they need it.
A systematic evaluation framework can help you identify financially stable insurers with proven track records of honoring claims.
Here’s the most simplest way how you can assess term insurance plans using objective, measurable criteria.
Filter 1: Claim Settlement Ratio (CSR)
The Claim Settlement Ratio represents the percentage of death claims a company approves against the total claims received in a year. A single year’s data can be misleading due to temporary variations. A four-year average provides a clearer picture of consistency.
The insurance industry’s four-year average CSR currently stands at 98.66%. This means that approximately 1-2 families out of every 100 face claim rejection during their most vulnerable moment.
It’s advisable to consider insurers maintaining a four-year average CSR above 99%. A CSR above 99% indicates the insurer has established robust underwriting processes upfront and maintains consistency in claim assessment. It suggests the company isn’t using claim rejection as a cost management tool.
Filter 2: Amount Settlement Ratio (ASR)
While the CSR tells you how many claims get approved, the ASR tells you how much money actually gets paid relative to the amounts claimed.
This distinction matters enormously. Insurance companies often approve smaller claims of ₹15-20 lakh quickly to maintain high CSR numbers. Larger claims of ₹1-2 crore face more intensive scrutiny and may be reduced or delayed.
Consider a scenario where a company has a 99% CSR but an 80% ASR. This means they approve 99 out of 100 claims, but families receive only 80% of the sum assured on average. The missing 20% represents partial claim settlements, where insurers find reasons to reduce payouts.
The industry’s four-year average ASR is 94%. For better protection, look for insurers with a four-year average ASR above 95%. This ensures that approved claims result in full or near-full payouts, not significantly reduced amounts.
If you find a company with a high CSR but noticeably lower ASR, that’s a red flag. It suggests the insurer may be playing statistical games, approving claims in principle but finding ways to reduce actual payouts.
Filter 3: Solvency Ratio
IRDAI mandates a minimum solvency ratio of 1.5 for all insurers. This number represents the ratio of available assets to liabilities. A ratio of 1.5 means the company has ₹1.50 in assets for every ₹1 of liabilities.
However, treating the regulatory minimum as an acceptable standard is misguided. A solvency ratio close to 1.5 means the company is merely avoiding regulatory penalties. Any business shock, economic downturn, or surge in claims could push them below this threshold.
Term insurance represents a 30-40 year commitment. You need an insurer capable of:
- Surviving multiple economic cycles
- Handling sudden claim spikes, as seen during the COVID-19 pandemic
- Paying large claims 20-30 years from now
A prudent approach is to consider insurers with a four-year average solvency ratio above 1.80. This provides a meaningful buffer above the regulatory minimum and indicates financial strength to weather adverse conditions.
Companies with higher solvency ratios demonstrate conservative financial management and adequate capital reserves. They’re less likely to engage in aggressive claim scrutiny during periods of financial stress.
Filter 4: Annual Business Volume
Premium volume indicates market standing and operational scale. Insurance operates as a scale business. Below certain volume thresholds, companies struggle to achieve operational efficiency and financial stability.
A reasonable benchmark is to look for insurers generating at least ₹5,000 crore in annual premiums based on a four-year average. While smaller insurers may also be reliable, larger premium volumes generally indicate stronger operational capacity.
Scale provides several advantages:
- Larger insurers negotiate better terms with reinsurance companies. This matters because reinsurers back most large claims. Better reinsurance terms mean smoother claim processing for high-value policies.
- A premium pool of ₹5,000 crore+ indicates millions of policyholders. This diversification allows the insurer to handle multiple large claims without financial strain. Smaller insurers with concentrated risk pools face greater volatility.
- Scale spreads fixed costs of IT infrastructure, claims processing systems, and customer service across a larger policy base. This operational efficiency translates to financial stability, not necessarily lower premiums.
- Large-scale operations can invest in advanced underwriting technology, fraud detection systems, and streamlined claim processing. These investments improve accuracy and speed.
- Companies generating ₹5,000 crore+ annually are established national players, not regional or niche operators. They have proven business models and established distribution networks.
Using these four parameters with the suggested benchmarks helps narrow your options to financially sound insurers with proven track records. The goal is not to find a perfect insurer, but to identify those with consistently strong performance across multiple critical metrics.
Determining the Right Coverage Amount
A practical calculation method requires four inputs:
Your Current Age: Determines premium costs and coverage duration feasibility.
Protection Timeline: How many years your family need financial protection? Most financial advisors recommend coverage until age 60-70, when children are typically independent, and major financial obligations are settled.
Monthly Family Expenses: The amount your family needs to maintain their current lifestyle. Multiply this by the number of years they need support.
Outstanding Liabilities: Total of home loans, car loans, personal loans, and any other debt that would burden your family.
A common rule of thumb suggests coverage of 10-15 times your annual income, but this often proves inadequate for high-expense households or families with young children.
Essential Riders Worth Considering
Critical Illness Rider
This rider pays a lump sum upon diagnosis of specified serious illnesses like cancer, heart attack, stroke, or kidney failure. The payout occurs immediately upon diagnosis, not after treatment completion.
The distinction from health insurance is crucial. Health insurance reimburses hospitalisation bills after treatment. A critical illness rider deposits money directly into your account when diagnosed, providing flexible funds for:
- Non-hospital expenses during treatment
- Income replacement during recovery periods
- Experimental treatments not covered by standard health policies
- Travel for specialised treatment
- Lifestyle modifications required for chronic conditions
Recovery from critical illnesses often takes years or may be incomplete. Ongoing medication costs, particularly for conditions like early-stage cancer requiring continuous therapy, or regular dialysis for kidney failure, create a sustained financial drain that health insurance doesn’t fully address.
Consider minimum coverage of ₹20 lakh, adjusted upward based on your income level, EMI obligations, and number of dependents.
Policy Term: Many insurers offer critical illness riders only until age 50 or with limited coverage periods. This is problematic because most critical illnesses strike after age 45. Ensure the rider extends to at least age 65-70 when you’re most vulnerable.
Accidental Disability Rider
This rider activates if you’re diagnosed with at least 50% permanent disability, whether from an accident or illness. It provides dual benefits:
- Premium Waiver: All future premiums are waived. Your policy continues without any payment from you.
- Lump Sum Payout: You receive the full coverage amount as specified in the rider.
This protection matters because disability can be financially worse than death. Your family loses your income while simultaneously facing increased medical and care expenses. The lump sum provides capital to restructure finances, adapt your home for accessibility, or invest for income generation.
Opt for minimum coverage of ₹40-50 lakh, recognising that disability creates both income loss and additional expenses simultaneously.
What to Avoid
Certain policy features sound attractive but fundamentally conflict with the purpose of term insurance.
Limited Pay Policies: These allow you to pay premiums for only 5, 10, or 15 years while maintaining lifelong coverage. The trade-off is significantly higher annual premiums. This structure makes sense for whole life insurance but defeats the cost-efficiency advantage of term plans.
Return of Premium Plans: These promise to refund all premiums if you survive the policy term. The cost is typically 3-4 times higher than pure term insurance. Mathematically, you’re better off buying pure term coverage and investing the premium difference in mutual funds or other investment vehicles.
Both options transform affordable term insurance into expensive quasi-investment products. Keep protection and investment separate.
Conclusion
Evaluating term insurance using objective metrics removes guesswork and emotional decision-making from the process. The framework presented here prioritises financial stability and claim honoring over marketing promises. It identifies insurers who have consistently demonstrated their commitment to policyholders through measurable actions over multiple years.
Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
