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Life insurance can be equated to a basic need today and a core component in every portfolio. But what is life insurance? The basic definition is the agreement or contract between the insurance company and the insured person. Under the same, the insurance company will offer life coverage for the policyholder throughout the policy period, paying out a mutually-agreed amount in case of the policyholder’s demise within the policy tenure or upon the plan’s maturity. The insured must disclose all relevant information while buying the policy and pay the premiums regularly. A life insurance policy thus becomes a financial safeguard for the policyholder’s nominees/family members in any unfortunate situation.
While having at least one insurance policy is a must, what about multiple life insurance policies in your portfolio? Is this a good strategy from a financial standpoint? If they are underinsured, your family might face financial problems in case the family’s sole earning member meets with an unfortunate incident. This is where having life insurance eases the stress and adds value to your portfolio. However, with multiple life insurance policies, it is essential to understand if you need just one life insurance or go for multiple policies.
This article will discuss having multiple life insurance policies and understand whether it’s a sound financial strategy.
Multiple Life Insurance Policies- How They Stack Up
Many people often possess life insurance coverage that is divided across multiple plans. In some cases, when the children are younger, parents often purchase separate insurance plans for them. When they grow up and begin working, many of them take additional life coverage. Several individuals keep adding life insurance policies to their portfolios for tax savings or scaling up coverage per evolving life stages and needs.
In most cases, having more than one or multiple policies is okay. However, while purchasing additional coverage, you should inform the insurance company about your existing coverage. This is basically due to something called the HLV (Human Life Value) aspect. Your sum assured of all the policies combined must not exceed your HLV. Therefore, to understand if multiple life insurance policies are right for you, you can look at it in two ways: calculating your HLV or considering the advantage of lower claim rejections.
How HLV determines life coverage
The HLV is a crucial concept in the life insurance industry, and insurance companies use this for calculating the fair coverage amount for a customer. The approximate upper limit of a policyholder’s ideal life coverage is calculated through this method. The two frequently used ways to calculate this are income replacement method and need-based method.
In the case of the income replacement method, the coverage is calculated by multiplying your annual income by the number of years left for retirement. So, for instance, if your annual income is 15 lakhs and currently you’re 40, and you decide to retire at 50, your HLV will be 15 * 10 = 1.5 crores.
To calculate using the need-based method, factors like your current age, retirement age, stage of life, i.e., married or unmarried, debts or EMIs, inflation, any existing life insurance coverage, investments, and savings, etc., will be taken into account. Therefore, it’s a healthy practice to calculate your HLV frequently or regularly.
Therefore, it is advisable to ensure that the sum assured of all the life insurance policies is below or within your HLV.
Buying multiple insurance policies from the claim rejection angle
Insurance companies sometimes reject claims for several reasons. Hence, many people feel they should invest in multiple policies as a backup in case one or two claims are rejected. For example, suppose someone needs life coverage of Rs. 45 lakh. Instead of buying one policy, they may split it into three parts of Rs. 15 lakh each. This comes from the perception that if one claim is rejected, then the nominees will at least get the remaining amount from the other two claims.
This strategy is fine; you can undoubtedly get multiple policies in your investment basket from this perspective. But, there are clear directives nowadays which state how insurance companies cannot turn down life coverage claims for policies that complete three years at least. This has naturally brought down the chances of rejections of claims by insurance companies. However, to ensure the same, policyholders must provide all information transparently and understand the inclusions, exclusions, and other terms and conditions. Therefore, you should ensure you give accurate information about your job type, age, life risks (if there are any at your workplace), income, health and medical details, family health details, and existing coverage to the insurer.
Conclusion
Hence, buying multiple life insurance policies is a good move, provided you stick to your maximum coverage limit, as per the HLV method. Knowing this maximum threshold is also essential before you scale up your existing life coverage by adding another policy to your portfolio. If you feel that you are underinsured, then you can buy another policy to make up the gap. However, it’ll be a good and reasonable practice not to split up your coverage into excessively small chunks but instead go for different maturity periods.
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