When you purchase a life insurance policy, you agree with the insurer so that your beneficiaries can file and receive financial assistance in case of your untimely death. However, for the insurer to provide this financial protection, the company must be sufficiently financially viable to pay you when you make a life insurance claim.
It is essential to check the insolvency ratio of the insurance company before buying insurance to know if the insurer is financially sound.
The solvency ratio defines the financial condition of an insurance company as good or bad by specified solvency criteria.
How is the solvency ratio calculated?
According to IRDA guidelines, all companies must maintain a 150% solvency ratio to reduce the risk of bankruptcy. The solvency ratio helps determine if the company has sufficient financial buffer to settle all claims in extreme cases. Therefore, it is a good indicator of the financial ability of an insurance company to meet short and long-term liabilities.
Solvency margin is calculated by comparing a company’s liabilities with its current assets. In other words, the solvency ratio is calculated by dividing a company’s operating income by its liabilities after tax.
Solvency Ratio = (Net Income + Depreciation)/Liabilities
Why solvency ratio is important ?
One of the most important factors to consider when buying an insurance policy is the wellness ratio.
“Insurance regularly receives hundreds of claims from its customers. In order to process all these claims and provide cash benefits to the beneficiaries, the company must have a financially stable and adequate fund ratio. This is a simple indication of how well you have been insured. You are more likely to fulfill your promise to pay the insured to your beneficiary, ”says Aditya Birla Capital’s website.
“By reviewing the insolvency ratio of a potential insurer, you can increase your chances of settling your claim before buying a life insurance policy. In addition, the solubility of the insurance company is an important factor in determining the insolvency ratio of an insurance company, which life insurance plan is the best option. Life Insurance says on its website.
This ratio is available on each insurer’s website. Be sure to finalize your insurance company after checking the wellness ratio.