What’s Your Fallback: When Your Term Life Insurance Doesn’t Pay Out To Your Dependents

by Vinaya HS on October 5, 2010

in Finance

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We generally purchase life insurance as a means for protecting our dependents from economic hardship. While most non-term life insurance policies such as endowment policies, whole-life policies, and such payout without much hassle, the same isn’t true of term life insurance policies — especially the ones issued by private insurers. How would you plan ahead and mitigate for such a scenario where your term life insurance doesn’t payout to your dependents?

You, of course, wouldn’t be there to witness this, but the purpose behind my question is to find out if planning for this financial risk is a good idea and if it is how would you go about it?

Personally, I think it’s a good idea to plan for this financial risk. The only options that I can think of are:

  • Track your net worth and ensure that it grows steadily. Your dependents could liquidate your net worth and plan accordingly. But for most of us, our net worth wouldn’t be remotely close to our insurance coverage. So, I’m not sure if this is even a valid idea.

What do you think?

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.

{ 3 comments… read them below or add one }

pattu October 5, 2010 at 7:25 PM

“The probability of a payout does increase with this approach”

Can your provide some supportive proof or examples for this? I don’t find intuitive logic good enough. Remember if your spread your cover your nominee will have to lot more paper work especially if there are some problems in claims.

Every death claim form has a column for stating other policies. So one claim dept. can refer to the findings of others. This may delay things further. I am not against multiple policies but I don’t seen any distinct advantage. I have a single policy from LIC. I dont trust privates they are bunch of *@#$. I have been truthful in my application and I hope for the best!

As for my fall back I have ensured my wife will have an immediate source of (small) income. IN the event of my death that will be her immediate for a few months hopefully before the claim arrives (if it does!!)

Vinaya HS October 6, 2010 at 4:06 PM


Perhaps I should have said “theoretical probability.” :-)

After posting this article, I happened to read a recent issue of Business World in which the profit/loss figures for private insurers have been provided. Most of them are operating under loss and I guess these losses are easily hidden under the parent company’s financial reporting umbrella.

A side note: How many of us actually look at such data before purchasing our insurance policies?

pattu October 6, 2010 at 11:49 PM

Why do you think the rejection ratio of privates is so high. Common sense suggest that this is linked to the losses they are taking.

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