Top Life Insurance Companies based on Claim Processing Efficiency

It is always difficult to choose life insurance companies for insurance cover.  There are various parameters which one needs to go through.  One of the most important parameters out of this is claim processing efficiency of life insurance companies.  Remember, for term life insurance, claim arises after your death.  Hence your family members need to make a claim and follow up with life insurance company for settlement.  Thus you need to ensure that their experience is hassle-free.

With this in mind, Bachhat has analysed claim processing efficiency of all life insurance companies for last 4 years (from 2009-10 to 2012-13).  While there is lots of data to play around with, presented below are key charts and takeaways for the readers.

Best 5 companies in settling claims

This is ascertained from low claim rejection rates.  Lower the rate, the better.

The largest player, LIC has the lowest rejection percentage as compared to all other insurers.  HDFC Life (erstwhile HDFC Standard), Star Union Dai-ichi, ICICI Prudential and SBI Life follows in that order.

Worst 5 companies in settling claims

Edelweiss Tokio has the highest claim rejection rate.  This is followed by Aegon Religare, Shriram Life, India First and Future Generali.  Pertinent thing to note here is that new companies have high claim rejection rate in initial years.

Time taken to settle claims

Another aspect to look is the time taken to settle once the claim has been filed in all proper respect with the insurance company.  Lesser the time, the better.

Based on FY12-13 data, DLF Pramerica has the worst record in this with only 3% claims settled within 1 month and as much as 58% taking atleast 6 months to get settle.  Similarly, Sahara, Star Union Dai-ichi, Edelweiss Tokio and Canara HSBC have substantial delays in settlement.

Let us also take a look at claim settlement record of best 5 companies which were shortlisted based on claim rejection rate above.

All companies, except for Star Union Dai-ichi, have good claim settlement record.

Outstanding Claim Analysis

Another way to look at delays in claim settlement is by analysing the ageing of claims outstanding.  Lets look at the ageing of claims outstanding for above 5 companies as of 2012-13.

From the above, it can be seen that out of total claims outstanding at the end of 2012-2013, for LIC 60% of  claims were outstanding for more than 3 months and almost 1/4th were outstanding for more than a year.  ICICI Prudential and HDFC Life fared better in this with only 17% and 4% of claims respectively outstanding for more than 3 months.

Conclusion

Based on the above, it can be concluded that ICICI Prudential, HDFC Life and SBI Life are most efficient in claim settlement process.  LIC also has decent record of claim settlement, but at times claims may get stuck.  In our subsequent analysis, we shall compare the competitiveness of the term plans of these companies.

PS:  Kindly note that above analysis has some inherent limitation such as (i) new insurance companies having sub-optimal claim settlement ratios, (ii) the analysis covers not only term plans but all life insurance plans (settlement ratios for term plan may drastically vary from this, but specific information for term plan is not available), etc. 

What has been your claim settlement experience?  Kindly share it with other readers in the comment section below.

Tax Free Bonds – who should invests?

This seems to be the season for tax free bonds.  We have already seen issues from REC, HUDCO and IIFCL; and now, PFC and NHPC have join the bandwagon.  Significant efforts are spent by media in analyzing all the issues i.e. what they offer to investors and which is the best one to invest.  In this article, we shall not look into that but focus more on who should invest in such issues and what aspects the investor needs to take care of before investing in tax-free bonds.  Before that, a synopsis of the ongoing PFC and NHPC bond issue.

PFC and NHPC issue

Bond issues for PFC and NHPC are open right now offering bonds for 10, 15 and 20 years for similar tenure.  Below are the brief details about both the bond issues:

The issue is priced at attractive rates which is same for both PFC and NHPC issue.  These being tax free bonds, any interest received on these bonds is tax free. Accordingly, if one considers pre-tax returns, they are higher than what long term debt mutual funds have provided in last 5 years (7.83% p.a. pre-tax returns as per Value Research).

Pre-tax Returns on PFC and NHPC tax free bonds

Interest Rates	Tax Bracket
	10%	20%	30%
8.43%	9.37%	10.54%	12.04%
8.79%	9.77%	10.99%	12.56%
8.92%	9.91%	11.15%	12.74%

Who should invest in such bonds?

The interest rates are excellent, risk is at the nadir and tenure is long term.  So whether all and sundry should invest in such bonds?  The answer obviously is no.  One needs to take care of following aspects before deciding to invest in these and any other tax-free bonds:

1. This is a long term investment.  Though the bonds are listed and can be traded, one needs to assume that they will not get back the money before the tenure of investment.  Even if there is 1% probability of you requiring the money anytime during the tenure, then one should not consider this investment. 
2. The pre-tax returns decreases for investors falling in lower tax brackets.  So in case you are in 30% tax category bracket, the investment makes more sense to you rather than for people falling under 10% tax category bracket.
3. If you have any loans outstanding, whether it is credit card loan, personal loan, car loan, home loan, etc, the money should be utilized in paying back the loan rather than investing in tax free bonds.
4. These bonds offers good returns as compared to debt mutual funds.  In case you are looking for long term investment in debt funds, tax free bonds are also an option to invest.
5. People on the verge of retirement can replicate this as a pension plan with regular income.
6. PPF returns are almost at par with returns on tax free bonds, however PPF offers more flexibility in withdrawing the amount when required (e.g. by way of loan) and returns on PPF are cummulative.  Hence one should exhaust PPF investment limit before investing in tax free bonds.

The above list is not exhaustive, but one should take the same into account before investing in tax free bonds.

Are you investing in tax free bonds? Share your reason for investing in the comments section below.

Debt Mutual Funds and Tax Implications – Recent changes in tax rates

Earlier Bachhat had written about how one can use ultra-short term debt funds to maximize post tax returns.  The article spoke about investing in dividend reinvestment plan of such funds, since dividend are effectively taxed at lower rate than short term capital gain rates and hence such funds are tax effective.

The tax rates on debt mutual funds were revised earlier during this year and hence the said article is not relevant in the current scenario.  Based on the revised tax rates, we have tried to analyse and tabulate which type of option (growth or dividend) should be chosen for investment in debt mutual funds.

Revised tax rates on debt fund

For an individual investor, short term capital gains in a debt mutual fund is taxable at tax slab under which such individual falls.  Long term capital gains are taxable @ 20% with indexation benefit and 10% without indexation benefit.  Surcharge @ 10% for taxable income of more than Rs. 1 crore and cess @ 4% shall apply additionally.

For dividend distributed, dividend distribution tax is applicable.  Earlier there was difference in dividend distribution tax rates between liquid / money market funds and other debt funds.  Now this difference has been eliminated and now dividend distribution tax on all debt funds shall be 25% (effective tax rate of 28.325% including surcharge and cess).

Growth or Dividend Option

One can maximize his returns from debt funds by choosing the correct option which has least tax implication.  Things to be considered before choosing a plan are:

1. Time period for investment
2. Tax bracket under which an individual falls
3. Need for regular income

Based on the above three criteria, the best option to choose from is as below:

When regular income is required

Since dividend distribution tax rate (28.325%) is higher than the effective tax rate for investors falling under 10% or 20% tax slab, it is beneficial for them to opt for growth option in case they are looking for investment horizon of less than 1 year and choose systematic withdrawal plan wherein a fixed amount shall be redeemed and paid to the investor at periodic interval.  SWP shall provide source of regular income to them.  However before opting for SWP under growth option, one needs to check out for exit load and commence SWP only after the exit load period. 

For individuals falling under 30% tax slab and in need of regular income, the tax benefit between dividend and growth option is minimal with dividend option slightly beneficial than the growth option.

For investment horizon of more than 1 year, it is beneficial for all investors looking for regular income to choose systematic withdrawal plan under the growth option.

When regular income is not required

For investors not looking for regular income, growth option is best irrespective of investment horizon.  However, there can be marginal tax benefit for investors falling under 30% tax slab by choosing dividend reinvestment option for investment horizon of less than 1 year.

Bachhat’s take

By increasing the dividend distribution tax rate, the tax advantage of dividend option which was available till late year has been eliminated, save for investors falling under 30% tax slab.  If an investor decides to invest in a debt mutual fund, he needs to take into consideration above aspects to increase his post-tax returns.  However one needs to keep in mind that the above analysis is relevant only till the tax rates are kept constant.  In case of any revision in tax rates (which may happen at the earliest in 2014 budget), the above may not hold true. 

Mutual Fund Tax Ready Reckoner for year 2013-2014

Continuing the initiative taken last year to provide a one stop solutions for tax implications on mutual fund investments, Bachhat has updated its mutual fund tax ready reckoner for the year 2013-2014.  

As you all are aware, mutual fund investors need to take into account plethora of tax rates to understand post tax returns.  Bachhat's mutual fund tax ready reckoner is an attempt to simplify and help mutual fund investors to determine the tax impact on their mutual fund investments.

You can view the ready reckoner by clicking on this link.  The link also provide rates for the last financial year (i.e. 2012-2013).

Impact of Budget 2012 on Individual Tax Payers

I have tried to calculate the tax implications of various announcements made in Budget 2013 for individual tax payers.  The calculations are carried out for individuals for income slabs for Rs. 5 lakhs, Rs 7 lakhs, Rs. 10 lakhs, and Rs. 15 lakhs.

Do have a look at it.  But a word of caution, these calculations are based on various assumptions I have made and the final tax liability may be different for individuals having the same income.

Budget 2013 and Impact of taxes on your salaries

Time for prudence, restraint and patience

“In a constrained economy, there is little room to raise tax rates or large amounts of additional tax revenues. Equally, there is little room to give away tax revenues or the tax base. It is a time for prudence, restraint and patience.” 

This statement made by Honorable finance minister Mr. P.Chidambaram summarizes what is (or is not) in store for individuals in this budget.  There has been no change in the income slabs based on which tax is determined.  To benefit individuals who earn less than Rs. 5 lakhs per annum, a minuscule tax credit of rupees two thousand has been given.  Besides this there is hardly any permanent additional benefit for individuals in the budget.  Certain changes which shall impact your tax liability and determine your investments are covered below.

Interest on home loan eligible up to Rs. 2.5 lakh

An individual planning to purchase residential housing property shall get an additional deduction of Rs. 1 lakh on the interest amount paid to service the home loan.  However, this benefit comes with many riders.  First, this benefit is for individuals who do not own any residential properties at the time of sanction of loan amount.  Second, the value of such property should not exceed Rs. 40 lakhs.  Third, the home loan amount should not exceed Rs. 25 lakhs and it should be sanctioned in financial year 2013-14.  If the interest amount during the year is less than Rs. 1 lakh, the balance amount can be claimed in the subsequent year. 

Scope of RGESS widened

Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced in the last budget to attract new retail investors to invest in equities.  The scope of the scheme has been increased to cover listed units of an equity oriented mutual fund and individuals having total income upto Rs. 12 lakhs are now elligible to claim this deduction.  The deduction, which was earlier restricted for one year, is now available for 3 consecutive years from the date of first such investment.

Other changes which impacts your investment decisions

The securities transaction tax (STT) on equity oriented mutual fund has been reduced which shall lead to increased returns from equity mutual fund investments.

On the other hand, dividend distribution tax on debt oriented mutual funds has been increased from 12.5% to 25% discouraging debt oriented mutual funds with dividend payout option.

Any transfer of immovable property, other than agricultural land, of value equal to or exceeding Rs. 50 lakhs shall attract 1%  TDS on the property value.

Further it has been proposed that where any immovable property is received for a consideration less than the stamp duty value of the property by an amount exceeding Rs. 50,000, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of individual.

Commodity transaction tax has been introduced wherein sale of commodity derivatives (other than those involving agricultural commodities) shall attract transaction tax @ 0.01%.

On positive side, the finance minister has proposed introduction of inflation indexed bonds or inflation indexed national security certificates.  This shall give investor inflation adjusted interest returns and shall be a good investment alternative.  The tax free bonds, which provide tax free interest to the investors, shall continue to be issued in the next year.

(Concise version of the above post was printed in DNA's edition of 1st March 2013)