Unlimited life cover

Some TV serials and even films espouse the importance of life insurance, but many a times, it tries to project an untrue and often debatable aspect of life insurance. For instance, suggesting a person take high value life insurance cover so that on his death, the family would get the proceeds which will ensure their financial woes. This is completely untrue and impossible because, even if your life is precious and priceless for your dependents, it comes with its share of economic value. In fact, your income or net worth are factors on which life insurance covers are offered and a must know element when an insurer is offering you a policy.

One of the oldest forms of arriving at how much one’s life is worth is based on the concept of human life value, which was put forward by Solomon S. Huebner, professor of insurance at the Wharton School of Business. The philosophy that governs his theory is that the family must be seen as a business, run according to business principles and protected against financial impairment or bankruptcy due to the loss of the partner’s life, which has a certain economic value. In effect, human life value is the net present value of a person’s potential future earnings over the rest of his working lifespan.

How much cover?

There are several ways to determine one’s life value and depends on variables such as your future earnings, inflation, longevity, family expenses and taxes if any. Human life value can be arrived at by one of the two ways – income replacement or expense replacement. In case of the former, an assumption of a fixed number of years for which your dependents will need financial support is the basis of the insurance cover. The rule of thumb states the sum assured on your life to be 7-10 times your annual income. However, this is too simple a method to be applicable for everyone. By using expenses replacement, you are closer to the money needed for your dependents in your absence.

It is for this reason that life insurers seek information like details or existing insurance policies before agreeing to insure you. So, if someone earning Rs 10 lakh a year with a liability of Rs 50 lakh outstanding on a home loan, with an existing Rs 1 crore life policy goes around looking for Rs 5 crore insurance, life insurers may not offer him a policy for such a high sum, as it is in not commensurate to his current finances. The reason for such an approach is to check the probability of your dependents profiting from your death.

A high insurance cover could also be a reason for foul play in causing the insured’s death. It is for this reason that several insurers seek details of deaths and dig deeper in case of accidental or unusual and untimely demise of the policyholder. It is also for this reason that life insurers do not cover suicide in the first year of the policy. For instance, to come out of a poor financial situation, one may take a policy and commit suicide to solve the financial woes of his dependents, which may be a good financial gesture, but may not cut ice with the insurer and of course leave the dependents emotionally devastated.

Exclusions

Generally, a suicide clause states that if death of the life assured takes place as a result of committing suicide within one year of the commencement of risk, the policy shall be void. Insurers explicitly state that ‘If the life assured commits suicide within one year from the date of commencement of risk or date of revival if revived, whether sane or insane at that time, the policy will be void and no claim will be payable’. What is important to note here is the operation of the exclusion clause from date of revival too, which is case of policies that lapsed and were later revived. However, beyond the period specified in the suicide clause, the claim is payable on death by suicide.

Think of life insurance as a deadly serious game: every year, you’re betting that you won’t live another year; the insurer is betting that you will. If you live (and lose the bet), you pay him a small premium; if you die (and the insurer loses), he pays your nominee the policy proceeds. You have only one life to wager on, but your insurer is playing the same game with millions of others. Since his risk is spread, he can offer huge odds. See life insurance as a tool to protect your dependents from financial woes in your absence than an instrument through which you could have undue financial gains. 

olmdesk@outlookindia.com