While most Indians are underinsured, it is also true that it's quite common to have multiple life insurance policies in India. This is more the case with traditional insurance plans like those offered by LIC via endowment and money back plans.
I regularly come across people who have a total sum assured (cover) of ₹10-20 lakh only but they have split it into multiple plans of a few lakhs each.
Generally, when a child is young, parents buy a LIC traditional plan or two for them. Something like a ₹3-5 lakh cover via LIC endowment plans. When this child grows up and begins working, some relative or known person will push him to purchase a LIC policy of his own.
Not just as life insurance but to save tax! And when the realisation occurs that traditional plans are no good, the same person finally buys a term plan. After a few years when his responsibilities increase (marriage, kids, house), it becomes evident that the existing insurance may not be enough and hence, there is a need to buy more coverage.
So, it’s perfectly fine to have more than one life insurance. Ideally, your life insurance requirements are best met via plain term plans. And if at any point you feel that your coverage is inadequate, then you should purchase another term plan to fill the gap in insurance.
But make sure that when you are buying new life insurance, you do inform the insurer about any of your existing life insurance.
The reason for this is the HLV or Human Life Value factor.
HLV decides maximum life cover
The concept of HLV is a technical one and is used by insurance companies to arrive at a fair value of the right life insurance coverage for an individual. It calculates the approximate upper limit of the life cover that a person should ideally have.
To simplify we can consider that HLV is a multiple of the annual income of the individual. Though in reality, there are a few other factors like age, medical conditions, nature of the job, etc.
So, let’s say that approx. The HLV factor limit for a given age band is 15. This means that you can have a maximum life insurance coverage of 15 times your annual income. So, if your annual income is ₹16 lakh, then 15 times (HLV) of this will put a limit of ₹2.4 crore on the life cover (15 multiplied by ₹16 lakh income).
Now let’s say you already have a few LIC policies that you purchased a few years back worth ₹30 lakh cover and you also have a term plan of ₹50 lakh. So, your existing coverage is ₹80 lakh.
As per the HLV factor of 15 for your income ( ₹16 lakh), the maximum cover you can have is ₹2.4 crore. So if you now want to purchase a new term plan to increase your cover, then you can only go for a maximum of ₹1.6 Cr (difference of ₹2.4 Cr and ₹80 lakh).
If you apply for a ₹2 Cr cover, then the insurer will ask you to reduce your application size to fit in the amount arrived at by the HLV factor.
That was about the HLV factor.
Should I buy multiple policies as few may be rejected during claim?
In the past, there have been cases of claim rejection by insurers and these get a lot of media attention every few months. So naturally, this plays on people’s minds that what if their claim gets rejected? As a result, they want to spread their bets and split life insurance into multiple plans instead of buying one large cover.
So if they need a cover of say ₹1.5 Cr, they think that buying 3 plans of ₹50 lakh each is better as even if one claim gets rejected, at least two will be honoured and ₹1 Cr will be paid to the nominees.
To be fair, there is nothing wrong with doing this. It is perfectly fine to have multiple insurance plans. But nowadays, there is now a very clear rule that says insurance companies cannot reject life claims (for any reason whatsoever) made on policies once the policy has completed 3 years. This rule, which is applicable as law, has in itself substantially decreased the probability of claim rejection by insurers.
But it is also your responsibility as a purchaser of insurance to make all relevant disclosures and provide material facts to the insurers. Make sure to share your correct age, nature of your job and life risks (if any) at job, real health condition, income, family health history as well as the details of your existing life insurance policies.
To summarise, buying life insurance isn’t a one-time activity. If your responsibilities increase or if you at any point feel that you are not insured properly, then please go ahead, and purchase an additional term life cover. But don’t split these into too many small parts as claim rejection doesn’t happen if you have been honest and accurate with your disclosures.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.