Life insurance is an essential product that provides protection along with investment. However, a family’s financial needs and goals may change over time. With increased assets, as well as responsibilities, a single life insurance policy may not sustain unforeseen events. In fact, opting for multiple life insurance policies may become vital after a certain point of time.
But first, it’s important to understand – what is life insurance? It’s a contract between an individual and an insurance provider, where in exchange for premium payments, the insurance company provides coverage against unexpected contingencies in life. There are different types of life insurance covers such as term insurance, Unit Linked Insurance Plan (ULIP), and endowment plan, which may be selected based on financial goals and budget.
When deciding on the type of life insurance policy and sum assured to choose, you can use a life insurance premium calculator. It’s a tool that can help you calculate the estimated amount of premium payable at regular predetermined intervals to attain the desired assured amount.
Fortunately, there is no limit regarding owning multiple insurance policies, and it is quite common to do so. But it may also be confusing as to how many life insurance policies one should own. Before finding out what is the optimum number of policies to purchase, some crucial factors should be considered.
Benefits of having multiple life insurance policies
- Additional coverage: Having more policies means adding more to the existing life coverage. This will potentially increase the income replacement for the family, which could otherwise compromise the standard of living of the family in case of unfortunate events.
More security: Owning more than one policy, especially from different life insurance policy providers, or opting for different schemes, also substantially mitigates the risk of claim rejection or delay in claim approval by an insurer. It will ensure that your family has a ready backup in such cases.
- Changed preferences: As needs and preferences change with altering stages in life, a single policy may not be enough to attain your long-term financial goals. So, opting for additional policies may be a welcome move.
- Economical spread: Based on additional coverage needed, buying a new policy may eventually cost less than increasing the coverage on the existing policy.
Nonetheless, having multiple policies may sometimes have certain drawbacks. One obvious demerit is a rise in the number and amounts of premium payments for additional policies purchased. Moreover, it may become an additional burden to maintain the premium payment schedules of multiple policies. Missing premium payments can also lead to losing the policy. However, these disadvantages certainly do not outweigh the benefits of having additional coverage.
Situations that may compel multiple schemes
- Tax benefits: Life insurance premium payments entail tax deductions up to Rs 1.5 lakh under section 80C of the Income Tax Act, 1961 (for policies issued on or before 31st March 2012, the deduction is restricted to 20% of the capital sum assured. And in respect of policies issued on or after 1st April 2012, the deduction is restricted to 10%). Additional insurance policies will be beneficial if the existing policy is not covering the entire limit of tax deductions available.
- Cost-benefit analysis: If the eventual benefits of multiple policies outweigh the costs associated with multiple premium payments, you should opt for additional policies. But cutting down on your present essential expenses just to add more policies for the future is also not advisable.
- Sum assured and human life value: Human Life Value (HLV) is an estimate of the present value of the insurer’s future income, investments, net of expected expenses and liabilities, which is calculated by the insurer. An insurer may reject additional policy applications if your sum assured exceeds your HLV. However, if the HLV exceeds the sum assured by a huge margin, additional life insurance policies are preferable.
- Workplace policy supplement: Companies generally provide group life insurance schemes for their employees, which are cost-effective but may not provide sufficient coverage for all individuals. Under such circumstances, employees may prefer supplementary life insurance policies for additional benefits.
Multiple insurance policies can protect the interests of policyholders in the best possible manner in case of unforeseen contingencies. While opting for multiple policies is a great option, it is certainly not essential for everyone. It is for you to judge, depending on your financial planning, existing insurance policy, number of dependents, etc. whether purchasing additional life insurance policies will be beneficial for you or not.