Why is LIC term insurance premium 70% more than private insurers?

My friend opened my eyes to this and compelled me to ask the questions - Why is LIC Term Insurance Premium three to five times more expensive than premiums charged by private sector insurer? Why should you pay higher premium for LIC term plans? Why not go in for private sector insurers’ term plans instead?

My friend had taken a term policy with LIC a few years ago. The premium he was paying was Rs 40,000 per Rs 1 crore. The term was for 20 years. He was reviewing his plan when he found that if he takes a fresh term plan from private sector insurers, he would save 75 percent on premium i.e. term plans offered by private sector insurers were 75 percent lower than LIC term plans.

He called his LIC agent and asked him why LIC was so expensive and the agent dismissively said that LIC honours almost all its policies with 97.7 percent settlement ratio against 88.6 percent for private sector players in fiscal year 2012-13.

[caption id=“attachment_75848” align=“alignleft” width=“380”] IRDA has an insurance ombudsman scheme where individuals can settle complaints out of court in a cost effective, efficient and impartial way. Reuters[/caption]

I did a comparison of LIC term plan premiums against other private sector insurers and found that for a 30 year old, a 20 year term plan for Rs 1 crore, the premium charged by LIC is Rs 30,000 while others including Prudential ICICI, HDFC Standard Life and SBI life were 70 percent cheaper.

My friend had a very valid point when he said that if something did happen to him, he did not want his family to be running around fighting battles with insurance companies. The point of taking a term is to cover liabilities and give financial support to near and dear ones if something was to happen to the insured.

Should he shift out of LIC to private sector insurers as he saves 60 percent to 75 percent in premium every year? Life insurers are regulated by the IRDA and have strict capital norms. Most of them have partnerships with big global insurers. Hence credit risk to a private sector insurance company policyholder should ideally be low. On a pure credit risk aspect on insurers, LIC does not have a big advantage over private sector insurers.

Drawing a parallel with government bond and corporate bond spreads, HDFC, ICICI and SBI trade at around 60 bps to 100 bps spreads over a government bond. LIC is seen as a Government of India risk and hence even if it prices itself higher, the difference should definitely not be more than 10 percent. For that matter even SBI is considered a Government of India risk and SBI Life premium is cheaper by 70 percent over LIC premiums.

Claim settlement ratio is definitely helping LIC price its premiums much higher than private sector insurers. However the difference in premium is too large to be ignored and it’s not as if private insurers do not settle claims at all.

The IRDA has an insurance ombudsman scheme where individuals can settle complaints out of court in a cost effective, efficient and impartial way. Individuals should use this scheme effectively. Policy buyers should also correctly and truthfully disclose all information while taking a policy. This will prevent any questions on claims. Fine print should be read with a magnifying glass to leave out all ambiguity.

A through due diligence done by a policy buyer will reduce chances of disputes by a wide margin. Policy buyers can then go in for the much cheaper term plans offered by private sector insurers.

Arjun Parthasarathy is founder Investors are Idiots.com and INRBONDS.com. Follow him on twitter @arjunparthasara