COMPARING TRADITIONAL LIFE INSURANCE PRODUCTS IN THE INDIAN MARKET: A CONSUMER PERSPECTIVE R. Rajagopalan1,Dean (Academic Affairs) T.A. Pai Management Institute Manipal-576 104 E-mail: firstname.lastname@example.org ABSTRACT
Life insurance policies are valuable assets to mitigate the financial risk of untimely death. As
such, every individual facing such a financial risk who can afford to pay for such a protection must
seriously consider purchasing some life insurance. In the current Indian market, this choice is
difficult on three counts:
• Inherent complexity due to uncertainty and long time horizons.
• The need to compare a plethora of different types of products from competing insurance
• Most insurance policies bundle pure insurance with savings to offer composite products.
There are two
broad types of life insurance policies available in the Indian market:
products consisting of Term Insurance, Endowment and Whole Life Policies
products, which are unit-linked life insurance policies where the investment risks
is borne by the policyholder.
This paper is an attempt at a comparative evaluation of the Traditional Insurance Policies
available in the Indian Market from a consumers’ perspective:
• Which type of traditional insurance product should I buy?
• Which insurance company’s product should I buy?
• Is it better to save through insurance policies or through the widely available tax-
advantaged Public Provident Fund (PPF)?
We use an expected present value approach, data on mortality rates, currently prevailing
premiums on insurance policies and interest rates- for the comparison within and across policy
We conclude as follows:
• Shopping around will save a lot of money for an insurance buyer
• Term insurance should be the primary choice for insurance protection
• PPF is likely to be a better savings option than buying endowment or whole life policies
1 The author gratefully acknowledges the research assistance provided by Mrs. Saritha C T.
Comparing Traditional Life Insurance Products in the Indian Market: A Consumer Perspective 1. Introduction
Life insurance is an appropriate financial tool for managing and mitigating the financial risk
associated with untimely death. However, Life Insurance decisions are often complex. The
choice of a life insurance product for an Indian Consumer is now a problem of plenty, even
when confined to only traditional life insurance products–term insurance and cash value
policies (i.e., whole life and endowment insurance). For any given product, we can choose
from amongst several competing insurance companies. Depending only on a policy
illustration provided by an insurance company can be a big mistake.
While comparing life insurance decisions, the concern of many financial planners is the
quantitative assessment of the cost of protection against untimely death and the return on the
savings component of the premium paid. Such an analysis can give a rational basis for
comparing different Insurance Policies. In this paper, we perform such a comparison of
traditional life insurance products. We propose to consider the unit-linked life insurance
products in a follow-up paper. 2. Choosing a Policy
A buyer has to find a policy which best suits his needs. Some of the important questions he
needs to ask himself are:
• Do I need protection for my entire life or for a specified period only?
• Is my current insurance protection adequate?
If I were not around, what would my
dependents need to maintain their quality of life?
• Should I create specific sums of money for meeting planned expenses? How much and
• How much premium can I afford to pay?
It is difficult to apply any rule-of-thumb, because the amount of life insurance one individual
needs depends on factors such as his/her wealth, sources of income, number of dependents,
debts, and lifestyle and risk aversion.
In this paper, we do not venture into such questions. We restrict ourselves to a comparison of
Insurance Policies for a given amount of death protection, term of protection, and/ or savings
accumulation. 3. Valuation of Cash flows in Life Insurance
A series of cash flows at different points in time can be valued for their E
alue (EPV). The payments may include: 1)
Benefits receivable under the policy 2)
Premiums paid under the policy
The EPV depends upon the amount, timing, and the probability of uncertain events
(mortality). For discount rates, usually a deterministic approach wherein the future interest
rates are assumed to change in a pre-determined way is used. For mortality assumptions, we
may use a life table function such as the one published by the Life Insurance Corporation of
India (LIC), described below. 3.1 Mortality Table
An insurance company should know with reasonable accuracy the chance of death at
each age. A mortality table gives an estimate of how many, out of the members of a
group starting at a certain age, are expected to be alive at each succeeding age. It is
used to compute the probability of dying in or surviving through any period. The mortality
table should be appropriate to the group of lives being insured.
The Insurance Regulatory and Development Authority (IRDA) requires that the mortality
rates used shall be by reference to a published table, unless the insurer has constructed
a separate table based on his own experience. In this study, we are using LIC’s 1994-96
(ultimate) mortality table2. 3.2 Discount Rates
What discount rate should one use to value each cash flow? Traditionally, a constant
discount rate was used for all the years in the term. This was either the risk-free rate or
the discount rate for a AAA-rated corporate bond, corresponding to the term of the policy.
This practice is appropriate only if the term structure of interest rates3 can be assumed to
be flat. This is typically not the case. Therefore, the current recommended practice is to
discount each cash flow by the current zero-coupon yield on a treasury security or
corporate debt of the same maturity. For example, a death benefit, expected to be
received five years from now, would be discounted by the current yield on a 5-yr zero
coupon treasury or corporate security. In this paper, we are using the zero-coupon
interest rate as on June 14, 2005, estimated as per the methodology outlined in the
website of the National Stock Exchange of India (NSE). 4. Term Insurance
A term insurance policy is a pure insurance product with no savings element. Term insurance
provides financial protection against death within a specified period of time, paying a benefit
only if you die during the term. Term policies will charge a lower premium than other types of
insurance. This may be suitable for young people or for families on a limited budget that need
2 ‘Mortality Rates of Assured Lives in LIC of India’ –LIC 1994-96 (ultimate), a mortality table of LIC, is to be used as
the base table for pricing life insurance products. These mortality rates have been estimated by LIC based on their
experience with policies in force during 1994-96.
3 Term structure is the relationship between the tenure of a cash flow and the annual rate of interest that the market
seems to be using to discount it to the present value (price).
4 This section merely updates the findings of an earlier paper by R. Rajagopalan (2003), “Valuing the Term Insurance
Products in the Indian Market”, TAPMI Working Paper Series No.2003/04.
a large amount of life insurance protection. For them, the affordability of the premium is likely
to be an important consideration. An easy way to compare the term policies in the market is
to find out the policy charging the cheapest premium for a given amount of protection and
term. Since term insurance is almost a commodity-type product, the cheapest is often the
For illustrative purposes, we consider a 30-year male. He is considering a level annual
premium term policy for a sum assured of Rs.10,00,000. Various terms under consideration
are 5, 10, 15, 20, 25 and 30 years. We consider the twelve term insurance policies available
in the Indian market in this paper5.
Table 1 highlights (in bold
) the cheapest policy for each policy term. Table 1 Comparison of Term Insurance Premiums
(Rs./Year) S. Term (years) Company Policy No 5 10 15 20 25 30 1
2230 2230 2290 2600 3070 3640 2
2650 2660 2890 3120 3530 4060 3
3260 3560 4050 4830 6050 7750 4
2950 2950 2950 3010 3160 ---- 5
2770 2820 2870 2920 3050 3430 6
3032 3032 3032 3032 3334 3905 7
---- 3400 3400 3700 4100 4500 8
2564 2564 2812 3227 3821 ---- 9
2160 2280 2430 2700 3050 ---- 10
2700 2600 2800 3100 3300 ---- 11
Shield 2043 2043 2150 2454 2964 ---- 12
Assure Life Line ----
3510 3970 4550 5280 ----
It can be seen from the table that:
• SBI Life Insurance provides the cheapest policy for the first five terms, i.e., up to 25 years.
For the 30-year term, HDFC Life Insurance is the cheapest.
• For some terms, the policies offered by some insurance companies can be more than twice
as expensive as compared to the cheapest policy. While it is entirely possible that
5 The above premium rates are the annual rates in rupees charged per Rs.1, 000,000 Sum Assured for a male life
currently aged 30. Premiums were collected from the websites of the insurance companies, using their respective
‘premium calculator’, as on 14th June 2005. This is true for all data in this paper.
underwriting standards6 may be more liberal and there may be some additional flexibility7
offered by such expensive policies, they do not seem to offer value for money for the buyer. 4.1 Estimation of Costs and Benefits
Assuming that one buys the cheapest policy available, does it offer value for money?
We assume that the premiums are payable in the beginning of each year and death
benefits will be paid at the end of the year of death. Our measure of estimated cost is
the Expected Present Value of Premium (EPVP). Similarly, our measure of estimated
benefits is the Expected Present Value of Death Benefits (EPVDB). These are defined
= ∑−[ P
/( + i
Term of the policy in years (5,10,15,20,25, or 30 years) T
: Year of payment of the premium t = 0,1,…, N-1
Probability of survival after t
years of a person currently aged x x
Age at the time of purchase of the policy (in our case, 30) CN
The applicable annual premium for a policy of term N
years and a sum
assured of Rs 10,00,000 (cheapest from table 1) it
Zero-coupon interest rate for a term of t
The numerator of each term within the summation gives the expected cash outflow in the tth
year and the denominator discounts it to the present.
= 1000000 × ∑−[t
Where, qx+t :
Probability that a person who is alive at age x+t
will die within the next one year.
The numerator of each term within the summation gives the probability that a person,
when buying the policy, will die during the t+1
th year. The denominator discounts
the payment of death benefit (Rs. 10,00,000) to the present.
We define two measures
of loadings or extra cost, both in percentage terms. Measure 1: (( EPVP-EPVDB) / EPVDB)* 100%
This expresses the additional cost as a percentage of the expected present value of death benefits.
This answers an important question of direct relevance to the prospective insurance buyer: how
6 Criteria used by insurance companies to decide whether or not a person should be offered insurance; and if so, at
7 For example, option to buy additional coverage or to extend the term of coverage
many additional rupees he has to pay for every 100 Rs. of expected death benefit? In other words,
what is the risk premium? Measure 2: (( EPVP-EPVDB) / EPVP)* 100%
This expresses the additional cost as a percentage of the expected premiums received by the
insurer. This answers an important parameter of direct interest to the insurance company: What is
the gross margin per 100 Rs. of premium collected? Table 2: Loadings on Level Term Policy Term in years 5 10 15 20 25 30 Cheapest Premium (Rs/year)
2043 2150 2454 2964 3430 (From Table 1)
9048.55 15432.47 20785.58 27147.92 35465.22 63
5221.80 10219.44 15312.06 20732.55 26586.70 03 Loadings Without any tax benefits on premiums
8 (figures in percentages) Measure 1
73.28 51.01 35.74 30.94 33.39 32.85 Measure 2
42.29 33.77 26.33 23.63 25.03 24.72 With 20% tax-benefit ( figures in percentages) Measure 1
58.62 40.81 28.59 24.75 26.71 26.28
From Table 2, it can be seen that Measure 1, i.e., risk premium, is the highest (73.28%)
for a 5-year policy and the lowest at 30.94 % for a 20-year policy. Measure 2, i.e., gross
margins for the insurer is the highest at 42% for a 5-yr policy and the lowest at 24% for a
20-year policy. Whether these loadings are acceptable or not depends on the risk
aversion of individuals. Whether these are reasonable or not depends on the costs and
reasonable profit loadings for an insurer9. 5. Endowment Policies
In an endowment policy, the benefit amount is payable either at the end of the term or upon
the death of the insured person, whichever is earlier. Thus, an endowment policy is a bundle
8 Insurance premiums are eligible for deduction within the permissible limit of Rs 100000 along with some other
investments. We are assuming a 20% tax savings on premium paid. This is irrelevant for Measure 2.
9 We plan to explore costs and profit margins in a later paper.
of insurance cum savings, providing death protection as well as a maturity benefit. These
policies are for a fixed tenure, usually up to 25 years, and the policy holder pays a fixed
premium periodically during the premium paying period.
Table 3 shows the premium structure of the endowment policies available in the Indian
. Table 3 Premium Structure of Endowment Plans
(Rs. /Year) Term in years S. Company Policy 5 10 15 20 25 30 No.
219240 100140 63920 45140 34330 27520
220620 106020 64920 43620 31520 24120
100740 65070 47000 37070 29820
105455 65867 46133 34883 27907
Reassuring Life 5
96948 60300 43762 34779 28756
Reassuring Life 6
98093 63737 44857 33612 26493
101632 63295 44167 33184 26348
Assurance 208829 102275 66530 47955 37818 31368
184610 84730 50160 32760 23160 17480
62420 42990 31890 25550 11
97646 60034 40356 29399 22735
Assure Security & 12
The simplest type of endowment policy is called, somewhat negatively, a ‘non-participating’
(non-par) policy. In reality, it is actually a ‘guaranteed’ policy under which the insurance
company has to pay the sum assured of Rs 10 lakhs, irrespective of what happens to its
investment incomes, actual number of policyholders who die etc. In other words, the
10 Aviva Life Insurance is offering an endowment assurance plan –Life Saver. But data is not available from the
insurance company bears all the risks. Naturally, the insurance companies are not very keen
on selling this simple policy. Even if they do, they have to cover their financial risks by
charging us a conservatively higher premium. Among the insurance companies, only Met Life
is offering a non- participating policy.
All the other endowment policies are ‘participating’
policies. In a participating policy, the
policyholder may get an additional sum of money called ‘bonus’
, based on the surplus
available in the funds managed by the insurer on behalf of the policyholder. Comparing
participating endowment policies is therefore not straight forward. A non-participating
endowment policy does not distribute to policyholders any part of its surplus. The premiums
for non-participating policies will usually be lower than for participating policies. 5.1 Non-Participating Endowment Policy Vs Public Provident Fund (PPF)
A non-participating endowment policy offers only one additional benefit over a term
policy: maturity benefit equal to the sum assured (S.A). From its premium, if we subtract
the annual premium for the cheapest term insurance policy for the same S.A, the extra
premium earns us this extra maturity benefit. Therefore, we can compare this with the
alternative of investing this extra premium in the best available pure savings vehicle11.
We must realize that it would be a mistake to subtract the premium for the corresponding
term insurance policy offered by the same insurer. This is a very likely mistake, as we
normally compare an endowment premium to the term premium of the same insurer12. If
their term insurance premium happens to be high, we may be talked up by the agent into
buying their endowment policy instead. An endowment policy typically provides him a
higher commission income.
In Table 4, we have calculated the loading on the extra premium of Met Life’s non-
participating policy. We compare the expected incremental costs and benefits, with the
cheapest term policy as the base: the Expected Present Value of the Extra Premium
(EPVEP) versus the Expected Present Value of Extra Maturity Benefit (EPVMB).
We use the same expression for estimating EPVEP as for EPVP in Section 4.1. The only
difference is that CN
will now be only the extra premium over the cheapest term
insurance (Row 3 of Table 4). There is only one possible additional cash benefit- maturity
value of Rs 10,00,000, if he survives the term. NEPVMB
= 1000000× P
/( + i
For example, for the 10 year policy,
EPVMB= [1000000×0.987088×1/ (1+0.0715)10] = 494603, where 10P30
=0.987088 and i10
11 This is an application of a method called ‘Buy term and invest the difference’
12 This is because an agent represents only one insurer.
From Table 4. we notice that longer the term, bigger is the loading. This implies that the
non-participating policy becomes less and less attractive as the term becomes longer.
The Public Provident Fund (PPF) is a long-term savings plan with attractive tax benefits.
It enjoys the same tax benefits as insurance premiums in the year in which payments are
made. A tax free interest at 8 % per annum is paid. Table 5 illustrates the accumulated
values under PPF (AVPPF), if the above extra premium is invested in PPF rather than in
the non-participating endowment policy for the respective time periods. Table 4. Loadings on Extra Premium of Met Life’s Non-Participating Policy S.No. Terms in Years 5 10 15 20 25 30 1
Premium for Cheapest
Term Policy for the same 2043 2043 2150 2454 2964 3430
term (From Table 1) 2
84730 50160 32760 23160 17480
Premium (Row 9 of Table
Extra Premium (Row2-
82687 48010 30306 20196 14050
EPV of Extra Premium 808598 624603 464146 335266 241651 176147
EPV of the Extra Maturity 721980 494603 329252 215028 137808 86430
Benefit (EPVMB) Loadings (in %) 6 Measure 1:
11.99 26.28 40.97 55.91 75.35 103.80
[EPVEP-EPVMB]/EPVMB 7 Measure 2:
10.71 20.81 29.06 35.86 42.97 50.93
[EPVEP-EPVMB]/EPVEP Table 5. AVPPF of Extra Premium of Non-participating Endowment Policy Term in Extra Premium (Rs/year) Accumulated Value under PPF Years
48010 1396393 20
30306 1480510 25
13 The maturity period for a PPF account is between 15 to 25 years only.
For finding out AVPPF, we are compounding the annual extra premiums at 8% per
annum. Since this extra premium will be paid only if the policy holder survives, we have
multiplied by the probability of survival in each year. For ensuring a correct comparison,
we have assumed that even if the PPF account holder were to die before the term, the
money will be left in the account to accumulate till the end of the original term.
Thus the estimate of accumulated value under PPF (AVPPF) equals N
− N tAVPPF
= ∑ P
: Extra premium over the cheapest term insurance policy.
Please note that in each case, the maturity value far exceeds the maturity benefit of Rs
10,00,000 under the non-participating endowment insurance policy. As an alternative for
savings accumulation, PPF definitely seems to be superior to the non-participating
endowment policy. 5.2 Participating Endowment Policy Vs PPF
Assume that we invest the extra premium of participating policies over the cheapest term
policies in PPF. Table 6 gives the estimates for the accumulated values of the extra
premium if invested in PPF (AVPPF). To get the accumulated value of the extra premium
of participating policies, we are using the same formula as in Table 5. Table 6. AVPPF of Extra Premium of Participating Endowment Policies
(Rs) Term in years
14 S.No. Company Policy 15 20 25 1
Save n Protect
Endowment (Cash Bonus)
ReassuringLife endowment 6
(Reversionary Bonus) 7
Assure Security & Growth 11
14 The maturity period for a PPF account is between 15 to 25 years only.