Cheapest Term Insurance Plan

In our analysis of top life insurance companies based on claim processing efficiency, we shortlisted 4 insurance companies, viz, LIC, HDFC Life, ICICI Prudential and SBI Life which has the most efficient claim processing mechanism and where the probability of your claim getting settled and paid quickly is more than for other insurance companies.

In this post, we shall compare premium amount for term insurance policies from these companies and check which one out of the four is the cheapest.

Premium Amount

Tabulated below is the premium of term insurance policy for sum assured of Rs. 1 crore with term of 30 years for an individual aged 30 years:

Insurance Company	Plan Name	Premium Amount
LIC	Amulya Jeevan – II	23,300
HDFC Life	Click2Protect	10,600
ICICI Prudential	iCare Term Plan	13,800
SBI Life	E Shield	11,690

Note: Premium amount is in rupees and excluding taxes.

Based on the above it can be seen that HDFC Life’s Click2Protect term plan is the cheapest term plan available, followed by SBI LIFE E-shield.

However, HDFC Life’s Click2Protect term plan do not have an option for accidental death benefits which is available with plans of other companies at an additional premium. Further the premium amount may vary differently amongst various policies depending on the term period and age of an individual and the above ranking may not hold true.

Also note that HDFC Life’s Click2Protect plan is cheapest amongst the four insurance companies which we have shortlisted.  It may not be cheapest amongst all the insurance companies.  For eg:  Similar term plan from Aegon Religare is available for Rs. 5,800/-.

Conclusion

Based on our analysis in this as well as previous post, we can conclude that HDFC Life’s claim processing is most efficient and it has one of the cheapest term insurance plan.

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.

HDFC's fixed cum floating rate home loans

Last week, Bachhat carried a post on ICICI’s newly launched fixed cum floating rate home loans and we also compared it with HDFC and SBI’s existing floating rate home loans.   

Read: ICICI’s Fixed cum Floating Rate Home Loans

Now earlier this week, HDFC has also introduced fixed cum floating rate home loan named “Fixed First”.  It is interesting to notice that many banks had discontinued fixed rate home loans when interest rates started to fall in 2008 and are now encouraging borrowers to take loans with fixed rates for certain tenure citing further rise in interest rates.

About HDFC’s Fixed First:

In HDFC’s Fixed First, the borrower has an option to choose the fixed rate tenure between 3 years or 5 years.  After the chosen period of 3 or 5 years, the loan shall be converted to regular floating rate home loan.  In ICICI’s offering, the option for fixed rate tenure was either 1 year or 2 years.  Thus in Fixed First, the rates shall remain constant for longer tenure as compared to ICICI’s offering. 

The table below gives comparison between HDFC’s and ICICI’s offering:

Loan Amount	HDFC		ICICI
	First 3 Years	First 5 Years	First 1 Year	First 2 Years
Up to Rs 25 Lakhs	10.75%	11.25%	10.50%	10.75%
> Rs. 25.01 Lakhs to Rs. 30 Lakhs	10.75%	11.25%	11.00%	11.25%
> Rs. 30 Lakhs to Rs. 75 Lakhs	11.25%	11.50%	11.00%	11.25%
> Rs. 75 Lakhs	11.75%	11.75%	11.50%	11.75%

Whether one should opt for fixed cum floating rate home loans at this point of time?

As Bachhat had noted in its earlier post on ICICI’s offering, in fixed rate loans, the benefits to borrowers and banks are exactly opposite.   It makes sense for banks to disburse more fixed rate loans when interest rates are at or are nearing peak and are projected to fall in the future.  However, borrowers benefit from fixed rate home loans if interest rates increases after they avail fixed rate loans.

Keeping this in mind, let us check the interest rate (Repo) movement since end of October 2005.

As can be seen from the interest rate chart above, we are almost nearing the peak rate in last six years.  Further, the last time the interest rates peaked, it did not last long and due to occurrence of various global events at that point of time, the rates began to fall.

From the above graph, we can deduce that interest rates are reaching their peak and may not remain high for elongated period and shall fall down.  Whether it shall happen immediately or after 6 months or 1 year is anybody’s guess.  However whatever may be the scenario, it does not makes much sense to tie oneself down to fixed interest rates for long period.

Whether shall you opt for fixed cum floating rate loans at this point of time?  Do let us know your views and suggestions in the comment section below.

ICICI Fixed cum Floating Rate Home Loans: How does it fare with other bank’s home loan offerings?

Last month, ICICI bank announced fixed cum floating rate home loan.  The interest rate on such loans remains fixed for one year or two years depending on the option chosen by the borrower and thereafter it shall be floating and linked to ICICI’s base rate.  Before we go into intricacies of this product, let us revisit some basics about fixed and floating rate loans.

Fixed vs. floating rate loans

In fixed rate home loans, the interest rate is fixed at the time of disbursement of the home loan and remains the same for the entire tenure of the loan.  In case of floating rate home loans, the interest rate is linked to the base rate of the bank and changes whenever the base rate is revised.  For eg:  If at the time of disbursement of loan, base rate of a bank is 9% and the floating rate home loan is priced at base rate + 100 basis points (100 basis points = 1 percent), then the interest rate for the loan shall be 10% p.a. (9% + 1%).  Later after three months, if the base rate gets revised to 9.50%, then the interest rate shall increase to 10.5% p.a. (9.50% + 1%). 

Fixed rate home loans are beneficial to the borrowers when the interest rates are projected to increase in the future.  Floating rate home loans are beneficial for the borrowers when the interest rates have peaked / nearing the peak and are projected to fall in the future.  For banks, it makes sense to disburse floating rate loans when interest rates are expected to rise and fixed rates loans when interest rates are expected to fall.  The table below depicts under which interest rate scenarios fixed and floating rate loans are beneficial to borrowers and banks.

Type of Loans	Borrowers	Banks
Fixed Rate Loans	Rates expected to rise	Rates expected to fall
Floating Rate Loans	Rates expected to fall	Rates expected to rise

As can be seen, the benefits to borrowers and banks are exactly opposite.  On the above backdrop, let us evaluate ICICI’s latest fixed cum floating rate loan offering.

ICICI’s fixed cum floating rate home loan

In this offering, the interest rate is fixed for first one year or two years depending on the option chosen by the borrower.  The interest rate for one year fixed rate loan is 10.50% p.a. for loans till Rs. 25 lacs and increases by 50 basis points for loans between Rs. 25 lacs to Rs. 75 lacs and another 50 basis points for loans above Rs. 75 lacs.  In case of two years fixed rate loan, interest rates are 25 basis points higher than the corresponding one year fixed rate loan.  After the completion of the chosen tenure, the interest rate shifts to floating rate regime and are linked to ICICI’s base rate.

ICICI’s fixed cum floating rate home loan:  Interest rate chart

Loan Amount	Fixed Rate for first 12 months	Fixed Rate for first 24 months	Floating rate from second / third year onwards*
Up to Rs. 25 lacs	10.50%	10.75%	I-Base + 0.50% (10.50%)
> Rs. 25 lacs to Rs. 75 lacs	11.00%	11.25%	I-Base + 1.00% (11.00%)
> Rs. 75 lacs	11.50%	11.75%	I-Base + 1.50% (11.50%)

* Based on current ICICI Base Rate (I-Base) of 10.00%

Source: ICICI Bank’s website

Thus, the differentiation of this offering is only for one or two years.  After that it becomes like any other bank’s floating rate home loan.

Comparison with other bank’s fixed rate and floating rate home loans

This offering is attractively priced if we compare with fixed rate home loans of other banks.  For eg:  HDFC is offering fixed rate home loan @ 12.25% p.a for loan amount till Rs. 30 lacs.  However, to be fair, this rate is fixed for the entire tenure, whereas in ICICI’s case it is fixed only for initial one or two years.  Hence we need to compare this offering with other banks’ floating rate home loans and judge how beneficial it will be for the borrowers in various interest rate scenarios.

If we look at other banks' floating rate home loans, the rates are not much different.  In case of one year fixed rate option, the rates are 25 bps lower than SBI and HDFC’s floating rate home loans for loan amount till Rs. 25 lacs. However between Rs. 25 lacs to Rs. 30 lacs, the rates are 25 bps to 50 bps higher.  Thus the benefit of ICICI’s offering depends on (a) the loan amount and (b) interest rate outlook for the next one or two years (as the case may be) to judge this offering. 

Interest Rate Outlook

RBI has been on a rate hike spree since the start of 2010 and has increase rates by 11 times since March 2010.  Though the interest rates are high at present, experts are predicting another 25 bps to 50 bps rise in rates by RBI before it takes a pause.  Thus there is a possibility of a couple of more rate hikes in next one year.  Few may also argue that the rates have reached their peak and there shall not be any further rate hike.  However, all these guesses are like shooting in the dark and it all depends on the overall global market conditions, economy, inflation and liquidity at that point of time.

Loan Amount

Here is a chart depicting benefits in case of ICICI’s offering for home loan amount of Rs. 25 lacs, Rs. 30 lacs and Rs. 35 lacs for the period of 15 years as compared to floating rate home loans offered by SBI and HDFC.  The chart illustrates the benefits based on existing interest rates and also in case interest rates increases by 25 bps or 50 bps or falls by 25 bps or 50 bps at the middle of the fixed rate tenure of one year and two years.

Benefit of ICICI Fixed cum floating rate home loan vis-à-vis SBI / HDFC Floating Rate Home Loan

Loan Amount	Fixed Rate Tenure	Interest Rate Scenario
		No change	25 bps rise	50 bps rise	25 bps fall	50 bps fall
2,500,000	1 year	6,246	9,328	12,409	3,166	86
	2 years	0	6,064	12,130	(6,062)	(12,121)
3,000,000	1 year	(7,498)	(3,801)	(103)	(11,195)	(14,891)
	2 years	(29,966)	(22,689)	(15,409)	(37,240)	(44,511)
3,500,000	1 year	0	(4,316)	8,632	(4,315)	(8,629)
	2 years	(17,486)	(8,988)	(487)	(25,982)	(34,473)

Note: Based on SBI / HDFC Floating Rates: 10.75% for loan amount till Rs. 30 lacs and 11.00% for loan amount > Rs. 30 lacs to Rs. 75 lacs

Though it is difficult to point out a clear winner, it can be seen that ICICI offering is attractive for loan amount till Rs. 25 lacs in all interest rate scenarios illustrated for fixed rate tenure of one year.  Fall of interest by more than 50 bps within a year (low probability of happening) shall make ICICI offering expensive.  Similarly, in case interest rate rises, the ICICI offering of two year fixed rate tenure is beneficial. 

Since fixed rate charged by ICICI for loan amount greater than Rs. 25 lacs is higher than the corresponding floating rate charged by HDFC / SBI, ICICI offerings becomes expensive for those who opt for loans between Rs. 25 lacs and Rs. 30 lacs.  Again for loan amount greater than Rs. 30 lacs, it depends on interest rates movement, however, the benefit is not substantial.

Thus it can be seen that the benefits varies substantially based on the loan amount chosen and expected interest rate scenario. The benefit is greatest for loan denomination till Rs. 25 lacs and for one year fixed rate tenure  The benefit keeps on reducing as the loan denomination increases.

Bachhat advises its readers to consider the benefits based on the loan amount required across various interest rate scenarios and then choose the best product.