How to choose a life insurance?

In India, there are 23 private life insurance players and 1 public life insurance company (LIC of India).  There are mainly three parameters one has to look at before choosing a life insurer. First, Claims settled and claims repudiated ratio, Solvency ratio, Duration of claims and commission expenses ratio/ premium for insurer. Most of the information required is available in the annual report on the regulator (IRDA).

The first is to check whether the company is making good on its promises on its claims when the claim is made. There is absolutely no use if you buy a life insurance because it was cheaper than the rest and when the unfortunate day comes after death of the insured, they don't agree on their obligation and repudiate the claim for some reason or another. The individual death claims statement gives the information of all the life insurance company's against which claims that were made, claims were paid, claims were repudiated and claims pending at the end of the year. This information is vital to decifer the actual reliability of a company as against the brand image (however big) they create with advertisements and however low (also in terms of premium) they can fall to dig into your pockets.
Truth be told, Aegon Religare, one of the cheapest life insurer and an online insurer has the worst performance with a 44.52% claims repudiated, which means that there is a 44.52% chance that the claim the family makes after the person's death won't be honoured for some reason or another. SCARY? yes! Just because they advertise the cheapest life insurance does not by any means mean that you should blindly go for it. Shriram (25.87%), Future General (21.53%), IDBI Federal (21%), DLF Pramerica (19.51%), SBI Life (16.73%), Max New York Life (14.9%), TATA AIG (17.07%), Canara HSBC (16.61%), Reliance (8.66%) are in decreasing order of the claims repudiated. So who's best? Star Union (1.38%), ICICI Prudential (3.14%), Kotak Mahindra (3.89%), HDFC Standard (3.97%), Birla SunLife (4.99%), Metlife (6.06%) are among the better perfomers. LIC still beats all of them with a repudiation rate of just 1%.

The Solvency of an insurance company corresponds to its ability to pay claims. An insurer is insolvent if its assets are not adequate [over indebtedness] or cannot be disposed of in time to pay the claims arising. As on March 2011, the lowest solvency ratio is of LIC of India with a solvency ratio of 1.54. That means, he has assets worth 1.54 for every liability of 1. All the private sector companies have higher ratios and I would believe that IRDA regulates effectively based on experiences from other global companies and sees that the Indian insurers are solvent. So I wont worry about this much.

The next criteria is to know is how long did the company take to settle the claim. This is useful to evaluate the efficiency of the claims processing. The 'Duration wise settlement of death claims' table in the IRDA annual report gives this information. Based on the life insurers who have settled atleast 4,000 claims, the percentage of policies that have taken over 6 months or more to settle are 0.02% for Birla Sunlife, 0.1% for Reliance Life, 0.12% for SBI Life, 1.24% HDFC Standard, 1.69% for Bajaj Allianz, 1.70% for Max New York Life, 3.87% for ICICI Prudential. The lesser the better. Hence, Birla Sunlife wins hands down in this group.

The cost of a policy comes from 2 things: the expected probability of a person dying in each category and the subsequent cost related to the claim and the commissions on the policies. It is difficult to analyse every policy of every company and assuming their probablities used by the companies are fair, we can get a good deal by choosing the policies where commissions to agents are least. IRDA doesnt give company wise information on this, but a public sector, private sector data.  LIC, the only Public sector company has higher commissions across all types of premiums(regular, single, first year, renewal and total). And correspondingly, LIC of India's premiums are much higher than that of other companies for even a simple term insurance plan.

Other factors for choosing a life insurance policy would be size, and brand image. Based on the above data and the necessary trade-offs, I believe Birla Sunlife Life insurance is the best bet.