Many people have multiple traditional insurance policies. But what about term plans? Do you just need one? Or should you have several?
Buying multiple insurance policies is quite common and completely legal in India. But do you need them? And should you buy multiple term policies?
Let’s try to answer these questions.
Multiple life insurance covers common in India
Here is what happens with most people in India. Parents buy traditional insurance policies in their children’s name. Once these kids grow up and start earning, they buy life insurance themselves. After a few years and an increase in responsibilities of a growing family, the realization occurs that the existing insurance cover may be insufficient. This leads to the purchase of many more life insurance policies. A hypothetical example of this timeline is given below.
-Parents buy traditional life insurance of Rs 5 lakh for the child
-This child grows up, starts earning and purchases Rs 25 lakh term plan himself
-After a few years (marriage, house purchase, children’s birth), another term plan purchase of Rs 2 crore happens
As one grows older, responsibilities increase. So, it’s quite natural that, at times, your existing insurance may no longer be enough. In such a case, it’s a good idea to buy a new bigger term plan.
Increase the insurance coverage if you are underinsured. If you can increase the cover of your existing policy, well and good. Else, go ahead and buy a new term plan to cover the deficit amount.
By the way, it’s not just family responsibilities that require an increase in life insurance. If you make a big loan-funded purchase (such as a house on home loan), it’s a good idea to have a term plan equal to the loan outstanding and a policy period equal to the loan tenure.
Don’t forget HLV
When buying your 2nd or 3rd term plan, you need to inform the insurance company about existing insurance policies (both term and traditional policies). Why?
Because of the concept of Human Life Value (HLV) factor that insurance companies use, to calculate the upper limit of the life coverage that someone can have. HLV, in simple terms, is a multiple of your annual income.
Let’s assume this HLV limit is 15. If your annual income is Rs 10 lakh, then this will put an upper limit of Rs 1.5 crore (calculated as 15 times Rs 10 lakh income) on the life cover.
Now, if you already have a Rs 50 lakh cover and apply for a new Rs 2 crore policy, then your application will be rejected. Why? Because the sum of existing and the new cover will be Rs 2.5 crore and that exceeds the HLV limit of Rs 1.5 crore we calculated above. In this case, you will be asked to reduce your application size to around Rs 1 crore so that it remains within the HLV limit.
Note: For HLV, insurers also use underwriting guidelines that depend not only on policyholders’ income but also on age, potential to pay the premium, etc.
Buying multiple plans for fear of claim rejection?
Some people fear the risk of claim rejection and want to spread their bets. So, they buy multiple smaller covers instead of a large one.
But there is now a rule that says insurance companies cannot reject claims made on policies after three years of the policy being in force on any grounds whatsoever, even if any fraud is detected.
This rule itself has substantially decreased the probability of claim rejection by insurance companies.
So there is not much to fear on this front. But it is now all the more imperative that you make all relevant disclosures and provide material facts.
What all should be disclosed? Your correct age, occupation and life risks (if any) in your job, real health condition, income, family health history as well as the details of your existing life insurance policies.
In my view, the best hedge against claim rejection is not multiple policies, but accurate and complete disclosure of all the relevant information. Of course, if one is still paranoid, then one can split life insurance across different policies and different insurance companies.
That is all about the topic of whether you need multiple term plans.Buying insurance may not be a one-time affair for everyone. Whenever you realize you are underinsured, make an effort to increase your life cover via plain term plans.