Spreading the Cover

Dipak Mondal/Money Today | Print Edition: April 2013

Buy one term insurance plan with a big life cover and be done with it. If this is what your financial planner has been telling you, you better question him about the merit of the advice.

Pure life insurance is cheaper than policies with both investment and insurance components, but is one term plan enough? No, say experts. There are many reasons you should have multiple insurance policies.


Conventional wisdom says that if you declare all information about your health correctly and undergo the required check-ups, the insurance company will not reject your claim.

However, it is equally true that claims do get rejected, even if the probability of it happening is small. Imagine what will happen if your dependents do not get the claim money after you die?

"Yes, multiple policies have benefits. If the claim is rejected by one insurer and accepted by another, the entire sum is not lost. Also, in such a case, the family can write to the company which has rejected the claim," says Jitendra Solanki, a New Delhi-based certified financial planner. This may force the other company to relook at the claim.

While buying multiple policies, make sure you diversify across companies as well, on the basis of their claim settlement ratio. Some insurers may charge a little more than others but it makes sense to pay extra to a company which has a better claim settlement record.


Instead of buying one 30-year policy, you can buy multiple plans with different maturities. This will help you cope with the changing needs at different life stages. This is because you decide the insurance cover based on your present liabilities, which may change with time. For instance, if you have a Rs 20-lakh loan which you will pay off in the next 10 years, there's no point taking a Rs 1-crore cover for 30 years that factors in the loan amount. A more prudent option will be to break the cover into two smaller ones of Rs 20 lakh for 10 years and Rs 80 lakh for 30 years.

"You may like to diversify term covers based on maturity-some policies maturing just after you stop working and some extending to the maximum possible tenure," says Lovaii Navlakhi, founder and CEO, International Money Matters.

"The life cover is not just a function of existing liabilities. It also accounts for significant liabilities one may incur in the near future. For those who prudently align insurance with life stages, having two-three plans of varying terms and covers is a good idea as this way one is at liberty to continue or discontinue policies on the basis of one's requirement," says Sunil Mishra, CEO, Karvy Private Wealth.


For reasons mentioned above, you can have more than one plan adding up to a big cover instead of one policy with a high sum assured. This will, of course, turn out to be costlier.

"If the cover is large, it is advisable to opt for at least two companies to ensure diversification," says Lovaii Navlakhi of International Money Matters. However, it is important to declare existing covers while buying a new one.


Should you have only term plans in your insurance portfolio? Should you avoid endowment policies or Ulips? The answer depends upon various factors.

If you already have an endowment policy or a Ulip, discarding them before maturity may lead to huge losses because of higher commission and low surrender value in the initial years of these policies.

"It is not advisable to surrender traditional plans due to the high losses involved. In a typical traditional plan, the policy holder gets only 30% of the total premium paid, excluding the first-year premium, if it is surrendered prematurely," says Navlakhi.

Investment insurance products discourage early exits. "They reward long-term participation and generally have high costs in the beginning to deter policy holders from exiting mid-way," says Mishra of Karvy Private Wealth.

If you have an investment-based insurance product, especially an endowment plan, it's best to continue till the end of the tenure.

Even in Ulips, where surrender charges become nil after the first five years, exiting after five or 10 years will lead to a loss. If the policy has been giving good returns, it is best to continue it.

However, if you are just starting go for a couple of term plans with different maturities adding up the required life cover.

1) As a hedge against claim rejection
2) To diversify across insurers
3) To have plans with different maturities to adjust cover according to changing liabilities
4) To break down a large cover into smaller ones

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