August 22 , 2013
Once in a while we come across clients who wonder if several insurance policies are better than having a single policy covering the entire risk. We shall explore this matter in this article.
Indemnity vs benefit insurance policies
The question of usefulness of keeping more than one policy is eliminated in case of indemnity policies like mediclaim and motor insurance. The reason is such policies only make good the actual loss you suffer to the extent of sum insured. They do not pay beyond that.
Take for instance that you buy 2 home insurance policies worth Rs 25 lakhs each. In the event of a claim of Rs 15 lakhs both companies would equally share the claim amount. In no case can you get over Rs 50 lakhs from both insurers put together even if the loss turns out to be higher.
So the question of keeping multiple insurance policies makes sense only in case of benefit policies. Benefit policies like life insurance, personal accident and critical care pay the entire sum insured regardless of actual expense or loss.
More than one life insurance policy to diversify risk
Now we come to whether having more than 1 life insurance policy is advisable. Ideally a life insurance cover should start from the time one bags liabilities until she stops earning. Thus if one is earning and has dependents to support or loans to pay off, his life should be covered with a term life insurance policy worth up to 10 times his annual income.
In benefit policies the only consideration is whether claims are honoured. This is reflected through claim settlement ratio of life insurance companies. People buying policies with huge sum assured might like to diversify risk by buying 2 or more separate policies with lower sum assured in each. The argument is claims of higher value are more likely to be rejected than smaller claims. But this is not a big concern since genuine claims would be honoured, whether huge or small.
However with age and change in life stages and liabilities one would have to enlarge their life insurance cover. Policy can be bought from a different insurer at such times.
Apart from diversifying risk this arrangement also gives the benefit of properly matching insurance duration to risk. When you take on a home loan you can buy a life insurance cover for the loan amount that lasts just till the loan ends.
Yet it is important not to accumulate too many policies. You would be putting your loved ones through a lot of anxiety if they have to scurry between scores of insurance offices to get claims settled.
Having multiple life insurance for extra cover
Technically no one can stop you from buying several insurance policies even beyond what is required for your liabilities and income but this is not a wise financial act. Fundamentally term insurance policies pay you to cover risk of a loss during the term of the policy. If loss does not happen then nothing is paid. Paying manifold premium to buy many life policies in the hope that your dependants get all the more money when you die is imprudent. The correct approach is to have insurance of sufficient cover and allocate money separately for investments according to goals so no money is lost whether you survive or not, on unnecessary insurance.
Finally buying endowment plans and ULIPs (whether one or many) is not advisable since such insurance cum investment policies do justice to neither your protection need nor investment need due to their costs structure and investment portfolio limitations.