All of us have learnt during our investment journey to " not put all eggs in one basket," which essentially means you should diversify your investments and not restrict exposure to only one asset class. But should you apply the same strategy for your term life policy as well by buying multiple covers from different insurers?
Many customers I know buy plain vanilla term life plans from two or more insurance companies simultaneously. Say, for example, today if they want to cover themselves for Rs 1 crore, they go on to buy two separate policies of Rs 50 lakh each from two different insurers at the same time. When I tried to understand the reason behind the same, I came to know that they did so to avoid the risk of claim repudiation/rejection. So, if they buy a cover from one insurance company and it gets rejected, they assume that the other would pay.
Understanding claim rejection
Considering the risk of claim rejection as a criteria before purchasing is fine. But, understanding the reason behind the claim rejections is better, so that you can mitigate this risk. One of the key reasons for rejection of death claims in life insurance is non-disclosure and / or incorrect disclosures of material facts. These disclosures could relate to income, occupation, medical history (of self as well as blood relatives). Apart from these disclosures, most of the insurers also ask for details of previous insurance proposals that may have gotten rejected/postponed, or revised and accepted with special terms, coverage details of existing life insurance, etc. If you disclose any of these details incorrectly, there is a chance of your claim getting rejected.
If you have made all these disclosures correctly, you can rest assured that an insurer would not reject your claim based on non-disclosure of material facts. If you are buying term insurance policies from two insurers and disclosing exactly the same facts to both, then both the insurers will have to pay the claim if it fulfils all the terms and conditions under the policy. It cannot happen that with exactly same disclosures with two insurers, one would accept and the other would reject your claim based on incorrect/non-disclosure of material facts.
Buying a single policy
So, insuring yourself with only one insurer is not risky if you have disclosed all the details correctly in the proposal form. In fact, there are some benefits of not splitting policies and buying cover from a single insurer.
Cheaper premium: Most insurers give discounts for a larger sum assured. Thus the premium for a large sum assured is cheaper than the sum of its parts. For example, buying two policies of Rs 50 lakh each could cost you more than buying a single policy of Rs 1 Crore.
Ease of claim: The nominee need not run around for the claim formalities – submitting the documents, proofs, etc. – to multiple insurers.
No risk of mismatch in details: There is a chance you could overlook mentioning certain details to one insurer while making simultaneous applications, which may lead to claim rejection. If you buy a policy from a single insurer, then there is no such risk of details mismatch.
Even if you decide to buy cover from two or more insurers simultaneously, you should take care of the following.
Give details in the proposal form, of all the insurers that you are making simultaneous applications to. Most insurers ask this question in their proposal form. Make sure you fill in same details of personal and family health history and existing insurance details in the proposal forms of all the insurers.
Diversification helps in mitigating risks and generate better returns. But in the case of term life insurance, you can mitigate the risks by making appropriate and correct disclosures. If you do so, you need not split your term life insurance plan among multiple insurers.
(The writer is the Chief Financial Planner at ValueCurve Financial Solutions)