Recent data released by the Insurance Regulatory and Development Authority Act (IRDAI) reveals that the insurance industry in India has a customer retention problem. As per the statistics for 2015-16, the Life Insurance industry as a whole retains only 61% of its new customers in the 13th month. This statistic further plummets to nearly 33% in the 61st month. This is worrisome for both the insurers and consumers.
The Persistency Ratio (PR) is an indicator of the percentage of insurance policies renewed every year. The number is counted at the end of every year for which the policy has been held. The low PR could be due to several reasons such as mis-selling, difficulty in policy renewal, wrong customer targeting, macro-economic factors and lack of financial awareness.
Why Low PR Is Bad For Consumers
Risks: Life Insurance products are typically long-term commitments. They are bought keeping in mind your family’s future fund requirements. When you don’t pay the premium or surrender your policy, you will lose your life cover, which puts your dependents at risk.
Benefits: If you have a paid-up policy (where you’ve paid the minimum number of premiums), you may receive life coverage, but, you may not receive the full investment benefits of your policy.
Costs: If you continue with a plan, you pay a fixed premium for the entire tenure. But surrendering an existing policy and later buying a new one would require you to pay a higher premium than the existing one due an increase in your age.
Mindset: If you have to frequently dump old life covers for new ones, it may imply that you haven’t calculated your insurance needs properly. This oversight may reflect even in your other money decisions.
Tax Benefits Lost: Surrendering a traditional insurance plan within two years from its commencement, or a ULIP within five years from its commencement, will lead to the reversal of any tax benefits you’ve claimed under Section 80 C.
What To Keep In Mind
Buying and dumping insurance products at frequent intervals must be avoided for good financial health. These must be bought after a thorough evaluation of your money plans and needs, so that you’re able to stick to them for the long-term for optimum benefits.
Here are a few things you must keep in mind before buying life cover.
Assess Your Needs: Take stock of your family’s long-term money needs before you jump into a life policy. Ask yourself questions such as why you should buy a Life Insurance policy. How much money would your dependants need if you were to pass away? Should you buy a term policy, an endowment plan or a ULIP? What should be the tenure and sum assured? And would you be able to pay premiums till the policy matures?
Buy For The Right Reasons: First and foremost, a life cover should be bought to cover your dependents against your demise. Do not purchase insurance for reasons like making up your 80 C shortfall, or for fulfilling the bank’s criteria for applying for a particular loan, and quit the policy once the purpose is met. Go through the clauses and understand long-term benefits of the insurance policy.
Where Are You Buying From? Mis-selling is a problem in the insurance industry. You must ensure you’re buying a life policy that suits your unique life requirements. Often, consumers buy the wrong product after being hard-sold by agents, or after being persuaded by a relative or friend. You should develop an awareness of your own unique insurance needs. After this, you can go online to take stock of all the insurance products available for you, and buy the one best suited to meet your unique needs. If you have dependents, you should always buy a term plan instead of an endowment plan, money-back policies or ULIPs.
Do Not Confuse Insurance With Investment: Insurance has traditionally been linked to investment in India. The lure of guaranteed returns attracts many investors. However, this leads policy holders into paying heavy premiums on products that combine low life covers with poor investment returns. Policy holders often wise up and dump these products midway into their tenure. Ideally, investment and insurance must be separated. Anyone with dependents should buy a term plan. Also, small savings schemes such as Public Provident Fund (PPF), and pure-investment schemes such as Mutual Funds may be able to generate higher long-term returns than insurance products.
Get Adequate Cover: Buy a policy which offers adequate coverage for you and your family. Ideally, the sum assured should be 10 to 20 times of your current annual salary. Don’t be swayed by premium costs alone. Make sure you get the right coverage for your unique needs.
Take expert advice to assess your insurance needs. When in doubt, go online to compare your options.
(The writer is CEO, BankBazaar.com)