In insurance no-medical, short-cut option can cost more

Published in Mint on, Jan 10 2013, Written by Kapil Mehta

I learnt the hard way that life insurance is a product that everybody needs but nobody wants. Twenty years ago when I began my career in a consumer goods company, I was astonished at the pace at which high-end cosmetics flew off retailer shelves. Here was a product that, in my simplistic view, nobody needed but everybody wanted. Ten years later as I moved into insurance, I expected selling to be easier than consumer goods because of the fundamental need for insurance. How wrong I was. Insurers struggle to get people to think about insurance. Even if people decide to buy insurance, less than half actually do.

Why is the dropout rate so high? A major reason is the paperwork and complex process of buying insurance. Consider this—a standard proposal form requires you to furnish over 100 bits of information about yourself; provide a self-attested identity, address and income proof; and perhaps undergo medical tests. All this needs to be done in a physical format and documents typically move between insurer and customer several times. This process is called full underwriting and takes a few weeks. Several customers get frustrated with the complicated process and just drop out.

Some years ago insurers began to address this issue by introducing simplified issue products. These are marketed as “hassle-free”, “no-medical”, “saral” or “tatkal”. These products have simpler proposal forms, no medical tests and get issued at one go. They have become particularly popular in remote areas, smaller towns, third-party distribution and the bank channel. Prima facie this seems a good development for people buying insurance but it really is not. Here’s why:
Simplified issue life insurance is expensive. Life insurance pricing is based on standard mortality tables. A product that goes through a full underwriting process and medical tests will typically be priced at 70-80% of the standard mortality table. Simplified issue products get priced at 120-150% of the table. Looked at another way, you may pay almost twice as much for the mortality or death benefit in a simplified issue product compared with a fully underwritten one. At one insurer, the cost of insurance increases from Rs.10,000 to Rs.17,000 per year for a 44-year-old person purchasing a 10-year insurance with a sum assured of Rs.30 lakh. What this also means is that in simplified issue products, healthy people subsidize the unhealthy. This is not a good insurance principle.

Simplified issue products typically restrict the amount of insurance you can buy. Insurers restrict their risk in simplified issue insurance by specifying maximum sum assured limits. The upper limit of this insurance ranges from Rs.10 lakh to Rs.25 lakh. I recommend death benefit that is 10 times your annual income which means that these products are adequate for people earning Rs.1 lakh to Rs.2.5 lakh a year. That is too low. Even if these insurances are bought from an investment perspective, the returns will be lower than other products because charges and expenses are higher.

When simplified issue products were initially introduced they sometimes had a two or three year death lien. This meant that in early death only the premiums would be returned and the sum assured would not be paid. To Insurance Regulatory and Development Authority’s credit, this feature was gradually removed because it considerably reduced the effectiveness of insurance.
Simplified issue medical questions are vague and leave room for claim repudiation. A typical simplified medical question is “Apart from minor ailments, such as cold and flu, have you received any treatment from any doctor or specialist or been hospitalized or undergone hospital treatment, in the last five years?” What is a minor ailment? Everybody I know has gone to a doctor over the past five years and should be answering “yes” to this question. In reality everybody answers no. Including such questions allows the insurer to issue your policy without a medical test because they know that if a claim were to be made they have the room to investigate and push back if needed. I am not suggesting that insurers will wilfully deny a legitimate claim in simplified issue insurance. However, insurers are big organizations and I do see front line claims executives exercising their own (sometimes incorrect) judgement in claims. It takes a lot of effort to reverse those decisions.

Many years ago while travelling the mountainous roads in Kashmir, I read a beautiful signpost put up by the brave engineers who risked their lives building those precarious roads. It said, “When you go home tell them of us. Say that for your tomorrow, we gave our today.” I am certainly not asking readers to make that severe a sacrifice but I do strongly recommend that you put in the considerable effort required today to buy a “hassle-filled”, “medicals-included”, fully underwritten life insurance product. It is a lot of hard work but will ensure that your nominees get the benefits you intend for them.

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