Term insurance: Myths around death claim denial ratio

Harsh Roongta

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“Private life insurers rejected more death claims than LIC in FY14” was the headline in a leading pink paper. Indeed data from the IRDA (which regulates all insurance companies) proved the point. LIC has paid 99% of all death claims while all private companies put together paid 92% of all death claims made on them during FY 14. In fact, LIC has a consistent record of having a very low percentage of death claim denials.

The record of the private life insurance companies varies widely across the 23 operational companies with some of them having a pretty good death claim payment ratios of 95% and one smaller company having paid only 76% of all death claims, making the average at 92%. The fact that LIC has denied only 8,000 death claims as against 7.6 lakh death claims made on them is really impressive. When we realise that private companies among themselves have rejected 10,000 claims even though the total death claims made on them were only 1,25,000, this statistic becomes even starker. The primary purpose of taking life insurance is providing safety for the family in the event of death of the breadwinner and denial of the death claim would negate this primary purpose. Does this mean that you should prefer only LIC while choosing your life insurance provider?

That brings us to the fallacy of relying on statistics alone to take this decision. The fact remains that a large number of death claims (around 18,000) were denied last year. We need to understand the reasons behind such large number (in terms of absolute numbers) of death claims being denied and the reasons, if any, why the private companies have denied more than their proportionate share of death claims.

For that we will need to understand why death claims are denied in the first place.

n Most cases of denials are because of incorrect or incomplete disclosures about the insured person.

n Most denials are in respect of death claims made within the first two years after the inception of the policy. In this respect, the older an insurance company gets, lower are the early death claims as a proportion of the total death claims made on them. So the older companies such as LIC have a major advantage and the older among the private insurance companies similarly have good claim payment ratios of 95%+ (HDFC Standard Life and ICICI Prudential Life) which has been improving steadily as their volumes grow and they spend more time in the business.

n The newer companies also suffer from the low denominator effect in that even a small number of denials can lead to a bad ratio since the number of death claims made is also small. For example, if only 10 death claims are made and even one is rejected it will still be a 10% denial ratio. As the companies become older and larger, this becomes much less of a problem.

n Larger death claims tend to be investigated and hence the private companies where the average sum insured is much larger than LIC have more denials due to reasons already mentioned in 1 above.

All this is not to take away from the stellar record of LIC in the matter of death claims but to understand the reasons for the apparently “not so good” record for some of the smaller life insurance companies. In fact it would have helped immensely if the IRDA could provide data for early death claims (made within two years of the policy being issued) and other death claims separately for each company. Even without access to such data, I am reasonably confident that such data would be far more equitable between all the insurance companies as far as rejection of early death claims is concerned.

These reasons are important to understand because of the consumer adoption of online term insurance plans where the top most concern we get from them is whether they can go for term insurance from a company that has a high death claim denial ratio? The response to that is that if you have made full and complete disclosures about your health, financials, occupation and habits then you can be rest assured that your claim cannot be denied. Conversely, if you are careless (or deliberately) and do not make full disclosure of all material facts, be rest assured that if the claim occurs within the first two years, your family is going to have issues with the claim settlement no matter which insurance company you have opted to go with.

In the end a term plan is not an investment and hence is bought only for giving peace of mind. As long as you make full and complete disclosures, you should buy it from the insurance company that is able to provide you with that peace of mind even if it means paying a little higher premium.

The author is Director, Apnapaisa. The views expressed in this article are his own