Should you buy term plan depending on claim settlement ratio?

In recent years, we have seen that financial literacy is slowly rising. Many people are now moving towards investment in mutual funds, financial planning, insurance, etc. though there is lot more penetration required as compared to global rate of financial literacy. Though people are now moving towards life term plans, but yet there are a lot of people who still continue with investment in traditional policies and many are still underinsured. As rightly said, insurance should do what it is meant for and not as a tool to create wealth. There are other better options than insurance to create wealth.

When it comes to buying life term plans people usually at first consider what premium the policy is charging and secondly look for claims settlement ratio. These days even the life insurance companies are advertising themselves by highlighting their claim settlement ratios. What exactly does the claim settlement ratio mean? In simple words, the claim settlement ratio shows how many claims were settled during the said period (usually one year) as against claims filed. Higher the claim settlement ratio, better it is. But now the question is that is it enough to consider only the claim settlement ratio while buying a policy?

Though important, it must not be the only thing that one must look for. There are various other things one must look before buying a term plan. Following are some them.

Incurred claim ratio
Incurred claim ratio (ICR) simply measures the amount collected as a premium by the insurance company as against the total claim amount settled during the period, usually one year. If the ICR is more than 100 per cent, then it means that the total claim amount settled is more than the amount that the insurance company collected as premium. If the ICR is between 50 per cent and 100 per cent, it means that the insurance company has collected more amount as premium than the total claim amount settled. If the ICR is less than 50 per cent, it means that the insurance company collected the amount as premium and is hardly giving out claims or is charging a huge premium as it is making relatively large profits.

Persistency Ratio
Persistency ratio shows the number of policyholders renewing their policies with the insurance companies in a given financial year. This shows the trust of the policyholder that the insurance company has gained.

Business
Looking at the business history can help you in understanding since when the insurance company is in business. This way you can gauge the experience a particular insurance company is having. Even having a look at the allied businesses that is run by the company. For instance, say LIC is in a life insurance business as well as it is an NBFC (Non-Banking Finance Corporation), LIC Housing Finance. This will help you to understand how much impact do these allied businesses have on it.

So, looking just at claim settlement ratio is not enough. It is better to look at other parameters as well. Even while selecting based on parameters, it is important to check the parameter at least over a 5-year period and look at the trend.