Here is a list of ‘action items’ for someone who has taken a term insurance policy.
1. Maintain a health record! Some take a term insurance policy with chronic illnesses. Some find out that they have a chronic illness (or is predisposed to one) when they take medical tests as part of the term policy application. Some develop it after the policy is issued.
No matter what, maintain a clean medical record. Collect all doctor prescriptions. If you develop diabetes or heart problems a couple of years later, you must have clear documentation about the date of onset of the disease.
It would be best to attach such documentation with the policy document. The nominee should be made aware of this.
Why? Because, insurers will depute detectives to verify claims (guess who is featured in this article! :)) Detectives will come to know of your doctor and could go ask the doctors receptionist questions like, ‘how long had this person been coming here?’ and the like. Even vague responses like, ‘for a long time’ can be twisted against you. The insurer can/will claim that you had the disease before the policy was issued and reject the claim.
Don’t think such things are possible? Read the games life insurers play!
Yes, yes, there is an ombudsman you can appeal to and in all likelihood they will overturn the insurer’s conclusion and direct them to pay up. Just keep in mind that you will not be around to do the leg work!
I have a 60 Lakhs term policy from LIC (at a whopping ~ Rs. 100 per day!). The premium was loaded for obesity (I was obese!) and hypertension (still have it). Three years later I was diagnosed with Myasthenia Gravis. Since this is a potentially life threatening disease I can neither switch insurers nor get additional insurance. I have clear documentation about the onset of the disease and surgery which I have stored with my policy document.
2. Stay healthy! Stay safe! Stay sharp! Obviously one should do not dumb things like start smoking after the issue of the policy. Although you are not obligated to inform the insurer about your smoking habit, it can be easily used against you. The insurer can claim that you lied while applying for the policy if they get to know you were smoking at the time of death.
Unfortunately, the same is true if you start participating in adventure sports after taking the policy.
What about starting to run marathons and trekking after issue of the policy? People have died from both! Beats me. Grey area!
At the cost of being branded paranoid, let me ask, what about passive smoking?
You accompany a set of friends who smoke, to the tea stall next to your office, every day. Then you die!
The insurer’s detective comes snooping around and finds out about your tea drinking habit. If the tea stall owner falsely assumes that you are a smoker too, the insurer can use it to ….
Yes, yes that is a bit extreme but certainly not impossible. Check out tales from ombudsman case reports here. My point is, be aware of your actions. Be very aware!
One more! You drink at a party and ask a teetotaller friend to drive you home. Both of you die in an accident. The police are unable to establish who drove the vehicle. Your wife sends a claim for 1 Crore to me the insurer. The policy is less than a year old. What will I do?
- Readily part with 1 Crore, because I take pity on your wife or
- use the situation to my advantage? Since who drove the car cannot be established, and since a simple blood test would reveal alcohol in your blood, and since the policy is less than a year old, I would treat the death as ‘suicide’ and reject the claim.
- The same can be done for less than a year old policies in case of drug overdoses and trekking accidents!
Note: What constitutes ‘suicide’ is not clearly defined in most policy wordings!
If you think term insurance is as simple as 1,2,3:
1: take policy, 2:die, 3:get money, think again .. and again!
Please recognise there is a lot of grey areas about death claims. People die in a variety of circumstances. People die in a variety of ways.
Please do not comfort yourself using Section 45 of the insurance act.
No policy of Life Insurance shall, after the expiry of two years from the date on which it was effected, be called in question by an Insurer on the ground that a statement made in the proposal for insurance or any report of a medical officer or referee or friend of the Insured or in any other document leading to the issue of the Policy, was inaccurate or false, unless the insurer shows such statement was on material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy holder and that the policy holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose.
Note: “Material" shall mean and include all important, essential, and relevant information in the context of underwriting the risk to be covered by the corporation.
Why not take comfort? Three reasons.
- As a corollary to section 45, all policies less than two years old can be (shall be?!) questioned without proof!
- There are countless cases in which policies older than two years old have been questioned without proof, with complete disregard to section 45, only for the ombudsman to point it out!
- The sum insured involved in such older policies was much, much smaller than typical term covers! So don’t expect insurers to hand out several lakhs on a platter to your nominee!
Always remember that you will not make the claim. Your loved ones will!
All analysis of claim settlement ratio is pretty much psychobabble! No ratio will matter when your nominee reaches out for the policy document!
3. Increase your net worth! Term insurance is just the first step towards holistic financial planning. A few years after you buy it, inflation will render the policy inadequate (assuming it was adequate when you got it!).
So ensure you start investing as much as possible for all your long term financial goals including retirement as soon as possible.
Unless your net worth increases at a decent pace, the sum insured will fall short of your families needs if you die a 10-15 year later.
In addition to the 60L LIC policy, I have a 30L group cover that IITM provides me. Five years ago this was enough for financial independence (my wife is as qualified as I am, and can find a decent job) and my sons education. Thankfully, I have managed to aggressively increase my investments, resulting in a decent enhancement in my liquid net worth.
By liquid net worth I am referring to investments made from my salary alone. As soon as it grows to about 1.5 times my insurance cover, I intend to stop my term insurance policy. It has served its purpose. I can utilise the premium amount in other ways.
The great advantage in online policies (assuming they work!) is that the premium is extremely cheap. So increase in salary and inflation will render it an insignificant expense entry in your budget. So if you have an online policy you don’t need to stop it down the line until you retire. Just don’t let that comforting thought stop you from increasing your net worth!
4. Recognise Risk Not buying term insurance is a risk. Buying one is also a risk! Despite all talk and analysis about claim settlement ratios, at the end of the day you pick an insurer you are comfortable with. Whether you have used logic or emotion to make the choice, the risk of claim rejection is very much there.
The only comfort is that ‘claim rejection risk’ is much lower in magnitude than ‘no insurance risk’.
No insurer will be ready to hand over the insured sum without a thorough investigation. Despite all regulation and rules, there is absolutely no guarantee that the claim will be honoured and honoured without delay.
Stop paying too much attention to claim settlement ratios. Each death is unique!
Therefore, ensure that your family can survive without your income for at least 6 months at any point in your life.
Ensure you stay safe, stay healthy, invest right, and maintain records!
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