23 Oct 2016

Why You Should Buy Multiple Term Insurance Policies

My financial advisor, Vipin Khandelwal, suggests that instead of buying a term insurance policy for the cover you need, buy 2-3 policies for smaller amounts [1].

He gives two reasons.

First, people's need for insurance changes as they go through life. As your assets increase, there's less need for term insurance. But insurance companies don't let you decrease the sum insured [2].

Second, Vipin says, a company may become bankrupt, but I consider this a highly unlikely scenario [3].

In addition to those two reasons Vipin gave, I found out a third: if you buy insurance for less than 50 lacs, you don't need to go through a painful medical test [4]. So, instead of buying a policy for a crore, buy two for 49.99999 lacs each.

For these three reasons, consider buying multiple term insurance policies for less amounts rather than one for a big amount.

[1] Needless to say, don't combine insurance with investment, by buying a pension plan, ULIP, endowment policy, or whatever other old wine in a new bottle the insurance companies come up with.

[2] You can dump the existing policy and buy one with less cover, but insurance companies may not be willing to offer you one at that time, depending on your health.

Even if they do, it may cost more. Why pay more? Instead split your policies now, which won't cost any more. Buying two policies for 1 crore each costs roughly the same as buying a policy for 2 crores.

[3] IRDA requires insurance companies to maintain a solvency ratio of 1.45, which means 45% more assets than liabilities (the total amount of insurance they've sold).

Even in the impossible situation of everyone making a claim the same year, the company has plenty of assets to pay everyone eventually.

The cushion also protects against fluctuations in market value of the company's investments — they would have to decline by 30% for the cushion to be wiped out, and even then the company has enough assets to eventually meet all claims, even if they were made the same year.

Finally, if an insurance company becomes insolvent, the government will either merge it with another company or take it over and honor claims, as has happened during Independence.

So, I wouldn't worry about an insurance company becoming insolvent.

[4] If you recently got a medical test done, you may not want another one. Or if you got bad results and want to exercise more before getting another medical test done, you may not want to get one right now. In those cases, it helps to have insurance without requiring a medical test.

Conversely, if you want a medical test anyway to check your health, you can get a free one.

No comments:

Post a Comment