Wrong information can deny you insurance

My cousin Amit’s insurance agent has been chasing him for a long time, trying to convince him that it is very important for him to buy a life insurance cover so that his family can have a financially secured future in case of his untimely death. The insurance agents’ enthusiasm would sometimes make one think that they are more interested in the security of your family than you are. Especially when the agent happens to be a friend.

Nevertheless, on the positive side, owing to constant follow up from the agent’s end, he proceeded in the matter. The thought that this insurance will help his family sail through in his absence, at least financially, conquered everything else.

Here he was…amidst a wad of forms. The real horror was providing the information asked for in the form — a lengthy proposal form asking for educational qualifications, health status, habits, employment, income and existing insurance and what not. Quite a dampener!

Having been coaxed into buying this insurance, this lengthy list of requirements proved another turn off for Amit. Not wanting to lose the sale at this stage, the agent assured him that it is not very important to give all the information especially details of the insurance policies that he already have. Just a mention of one or two of policies was enough, the agent said.

Amit thought that finally he made it — but he made one of the biggest mistakes one would do. And his policy was declined. This is why he had come to me as he wished to know the reason why his policy was declined.

More on Amit later…before that I would like you to know the role of underwriting process in issuing insurance polices. So what actually is underwriting and why it is important. So every proposal that comes to the insurer is evaluated by a team of experts on two grounds — medical and financial.

Medical underwriting is the process where your current health status is evaluated and a medical test is conducted to ensure that you fit into the risk bracket and can be insured.

Financial underwriting is the process where the insurance company looks at your income and accordingly agrees to give you a cover which is a multiple of the same, say 15 or 20 times your annual income.

Why is financial underwriting?
Amit is a 32 year-old working professional with an annual income of Rs3 lakh. He already has five insurance policies with different companies for a total sum insured of Rs25 lakh. This time he had applied for a term insurance, for a sum insured of Rs1 crore.
The insurance company declined the proposal saying that the maximum cover that he is eligible for is another Rs50 lakh only.

Amit is confused and thinks that when he does not mind paying for Rs1 crore cover, then why is the company denying him? Aren’t they happy that he wants a bigger cover? Don’t they like a fat premium income for the company? So, why I am being denied ¤1 crore additional life cover?

“Hold your breath Amit,” I quipped.

Let us now start afresh. If Amit were to live till his working life (till 58 years), he would have earned a total of Rs75 lakh i.e. Rs3 lakh x 25 years. This is an approximation as next year his income will rise but the number of years will reduce and so on.

Amit already has an insurance cover of Rs25 lakh and with this new Rs1 crore cover his total insurance would be Rs1.25 crore. Amit’s value is more when dead, rather than when he is alive! In simple words, if Amit dies, his beneficiaries would get more than what they would get if he lived. Going by the same logic, the insurance company denied him the requested cover.

Insurance is not a mechanism from which you can make profit, as once it is established that it is more beneficial if you die than when you live, it can be misused for purposes other than what it was purchased for. Insurance-related crimes are a known fact world over.

If you do not disclose any of your existing policies or disclose only a few of them, the insurance company is entitled to reject the claim on your death. The purpose of taking this new policy is completely defeated as your dependents will not get the money as planned for.

So next time, when your insurance advisor insists upon you to provide “all” the policy details, please do not threaten your agent that you will withdraw your application. He may happily process your application without this information, but it is your family that will suffer and not his.

The writer is a certified financial planner with financial planning firm Roongta Securities. He can be reached at
harsh@financialsuraksha.com