Human lives are believed to be invaluable, and for that reason alone, there should arguably be no limit to the insurance cover one can get, especially if one can afford the premium. However, even if that is the case, the big question is: is it possible for you to get an unlimited life cover?
Experts say that life insurance by nature is not ‘indemnity’ insurance, but only a ‘benefit’ payout. Indemnity insurance is one where the asset to be covered has an ascertainable value and only that value forms the basis for insurance in appreciating/depreciating or market value methods. Since a human life is invaluable, it has unlimited value and theoretically insurance can be taken for unlimited value.
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However, there are two critical points here that need consideration: One, “life insurance does not insure life, but insures the ‘financial impact’ of loss of life. In that sense, every life while invaluable to the family and friends has some income earning potential, which is the basis for ascertaining the sum insured for life. For example, young children and very old people may not be earning and by that yardstick, may not have insurable life value. On the other hand, earning lives have high insurable value proportionate to the number of income earning potential discounted to the present value. By thumb rule, usually it’s about 8-10 times of “earned” income of a middle aged person,” says Dr P Nandagopal, Founder of Insurance Inbox.
Sunil Sharma, Appointed Actuary & Chief Risk Officer, Kotak Life Insurance, explains that the life cover required by an individual depends upon the loss of future income to the beneficiary, if the insured person were to expire prematurely. “This is simply called how much insurable interest the beneficiary has in the life of insured. Any cover offered by insurer over and above insurable interest leads to significant moral hazard risk. For example, insurance need for person A, aged 45 with 15 years to retirement with annual income of Rs 3 lakh, will be much lower than the insurance needs of person B with the same age and time to retirement, whose annual income is, say, Rs 25 lakh,” says Sharma.
For simplicity, ignoring salary growth, if A were to die prematurely, the family will lose income of Rs 45 lakh (i.e. 15 X 3) expected to be earned over remaining working life time of A. However, if B were to die prematurely, the family will lose a future income of Rs 375 lakh (i.e. 15 X 25). The family of A has an insurance interest of Rs 45 lakh, whereas the family of B has an insurance interest of Rs 3.75 crore.
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Thus, the earned income potential multiple forms the basis for life assured. The other factor to be taken into account is the ability to pay for premiums. A person may have large potential earned income but if his/her current income is not sufficient to pay for the premiums, then those policies lapse causing loss to all. So, “companies usually ascertain that the person concerned has sufficient current income also (usually minimum 10x of the annual premium costs) to keep the policies in force. This check also prevents people taking large value policies on their lives/ lives of kith and kin and later indulging in suicides/killing for insurance gains,” says Nandagopal.
Taking these two factors into account, unlimited life cover is only a theoretical proposition. Since both potential income and capacity to pay are finite numbers, there is no unlimited insurance cover that can be taken on the life of any. Moreover, a high value insurance cover beyond the insurable interest could also be a reason for foul play in causing the insured’s death. Therefore, insurers tread cautiously.