Tip Tuesdays: How To Spread Your “Risk of Trust” When Buying Term Life Insurance

by Vinaya HS on August 24, 2010

in Finance

Thanks for visiting Capital Advisor. I frequently update this blog to cover various topics on personal finance such as investment strategies, financial products that you should buy and ones that you really should stay away from, financial calculators, emerging themes such as early retirement and financial independence, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

When it comes to buying term life insurance, most discussions that I have had with friends and readers and that I have read online lead to a single question: “Can I really trust the insurance company to honor its commitment at the time of payout given that quite a bunch of them have a high claims rejection ratio?”

At the same time, most want to play it safe and stick with LIC given its sovereign guarantee (which, in my opinion and given the the state of world finance in general, isn’t something that you can honestly count upon).

A safe way out then would be to spread your “risk of trust.”

Suppose you’re looking for a cover of Rs 1 crore through term life insurance. Buy coverage of Rs 50 lacs from the insurer that you trust most and coverage of Rs 25 lacs each from two other insurers who you trust to a lesser extent. You get the same cover in total but you’ve also mitigated the risk to an extent.

What do you think?

Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 9 comments… read them below or add one }

Digamber August 24, 2010 at 10:01 AM

Here i am agreed with you, i have spread (risk of Trust) my term insurance like 50 Lacs (Religare), 40 lacs (Icici) and 30 lacs (LIC).

Regards
Digamber

Vinaya H S August 24, 2010 at 1:04 PM

Neat strategy. By the way, how did you arrive at the total required cover of 1.2 crore? Did you use any specific financial calculations?

Digamber August 24, 2010 at 2:57 PM

Hi, No i have not reached at your financial calculation part. i have a financial planner. have more interest in investing and investment with no debt/liability. you can say i am like hungry for the information on investing. i got your website from ‘Amit Agarwal’s Indian blog list”. and i click everyday on your website. thanks for sharing the information and advise on your website. i am really appreciate the way you put your thoughts. i am sure there are many people like me. thanks.

Vinaya H S August 24, 2010 at 2:59 PM

Thanks for the kind words. Much appreciated.

Digamber August 24, 2010 at 3:13 PM

I feel you deserved the appreciation.

Austin August 24, 2010 at 9:03 PM

Right on! I totally agree with this approach of mitigating risk.

pattu August 26, 2010 at 11:24 AM

Consider the following:
I have three policies from A, B and C. I die. All three investigate my death. A finds a loophole (legitimate or otherwise; relevant or otherwise) which they can utilize. Either myself or my nominee would have to declare at some stage about existence of other policies. Since A,B,C can do invetisgate anything they want and are aware about other policies, B and C can fiind out the results of A’s investigations. All three can now hold up payment.
Ombudsman can clear it (hopefully!) but it is thrice the hassle.

The best way to avoid risk is to fill up the form ourselves and declare everything. Multiple policies may be a good idea for someone in 20s. Someone in 30s with some health issue it will be expensive and can lead to hassle to the nominee

Vinaya H S August 26, 2010 at 11:30 AM

@Pattu: Could you elaborate further on: “Multiple policies may be a good idea for someone in 20s. Someone in 30s with some health issue it will be expensive and can lead to hassle to the nominee”?

pattu August 26, 2010 at 1:45 PM

I think this link will clarify what I meant better

http://www.themoneyquest.com/2010/01/split-term-life-insurance-plan-policy.html

If there are health issues its easy to see it will compound the problem.

Previous post:

Next post: