Life insurance is an essential aspect of financial planning. It covers you from the risk of death and ensures that your family sails through financially even in the toughest of times. There are various ways to get life insurance. We have discussed the types of life insurances in the earlier post.
The simplest one in the above categories is term life insurance. Term insurance is a contract where life insurance company undertakes to pay a specific amount of money known as sum assured to the nominees of the person who has taken the insurance. The premiums are low and the amount of sum assured is high.
Since this is the product that involves huge risk for insurance companies, the process involved in obtaining a term insurance is quite complicated and requires a lot of documents and proofs.
Many times, it so happens that a company has denied the application of term insurance even when one has submitted all the required documents and proofs.
In this article, we are going to cover the reasons why a term insurance policy application may be denied by the insurance company.
Term insurance policy is underwritten on the basis of income earned by an individual. The amount of sum assured to be provided is based on the multiple of annual income earned by the life insured. This multiple varies for salaried and self-employed individuals. Also there is a certain limit below which the sun insured cannot be given.
For example: HDFC Life doesn’t offer a term insurance below sum insured of Rs. 50,00,000. Hence, if the income multiple of an individual looking to buy the term insurance falls below the minimum sum assured then the policy can be denied. Yet another reason that lower income can impede your approval is that the insurance companies need the policy owner to justify their ability to sustain the cost of insurance cover. This follows the principles of 'Insurable Interest'.
For instance if someone wants a 1 crore rupees term insurance policy but has no assets or supporting commensurate income, there is a high probability that he or she won't be approved for coverage.
Some jobs or professions involve a higher degree of risk than others. Life insurance companies are cautious about giving the insurance to individuals working in such jobs. Some jobs in businesses like firecrackers factory, hazardous chemical companies, electrical line installers, truck drivers, flight engineers or any other occupation that involves huge risk at work are usually denied the cover by insurance companies as it involves higher risk than an individual working in safer occupation.
Pre-existing health conditions or illness
Getting term insurance is easy in the early stage of life as the chances of having health complications are low. Once the age progresses, the chances of getting these diseases increase. Insurance companies do a detailed health check-up before issuing the policy.
Once the disease or illness is detected during the medical test, the insurance company will either apply a loading (increased in premium to cover the higher risk) or deny the life insurance right away. This is dependent on the results of medical tests conducted by insurance companies. As an individual, it is important to disclose all the details regarding health conditions to the insurance company to ensure that claims are not rejected.
Like the dangerous occupation discussed above, there are also extracurricular activities that are considered hazardous, and carry a higher risk of premature death. Participants of activities like mountaineering, base jumping, rock climbing and other adventure sports may find it difficult to get life insurance.
For example, in the case of scuba divers, most insurance companies will insure them but it depends on the type of diving they do, the amount of times you drive a year, or the place and depth that they usually dive. It is important to disclose the facts regarding these activities.
Earlier rejection of application by other insurance companies
Insurance is a business of underwriting risks. Each company involved in the business of insurance takes huge risks by insuring lives at very low premiums. They are profit making entities and their job is to ensure the risk is reduced to the lowest level.
In the case of individuals whose application is declined by another company, the overall risk increases. Having said that, the circumstances and the reasons behind previous application rejection would normally play a significant role in the final decision by the new insurer.
It is important to disclose all the facts accurately to assist the insurance company in underwriting your policy. In most of the cases, insurance companies might apply loading (increase in premium) and issue the policy. This is still better than not having life insurance itself. If the facts are disclosed, there won’t be a chance of claim rejection.
CA Rohit J. Gyanchandani is Managing Director, Nandi Nivesh Private Limited, A Pune based Wealth Management Company.