Telescopic premiums

Double the life cover and you might expect to pay double the premium. Life insurance does not work that way.

The workbook says life insurance premiums are telescopic. Premiums do not go up in the same proportion as the sum assured.

A larger sum assured can be insured for a lower rate of premium per thousand of sum assured. So the bigger the cover, the cheaper each thousand rupees of it becomes.

That is an argument for buying from one company rather than spreading small policies around. Split the cover across insurers and each one prices its slice as a small policy.

But the discount does not go on for ever. Telescopic rates stop after a certain level - say Rs 2 crores for a particular insurer.

Beyond that point there is nothing left to gain from one large policy. So the advice changes.

The rule. Life insurance premiums are telescopic, which means premiums do not go up in the same proportion as the sum assured. A larger sum assured can be insured for a lower rate of premium per thousand of sum assured, and hence it makes sense to buy policies from the same company.

Where the discount stops. Telescopic rates stop after a certain level, say Rs 2 crores for a particular life insurance company.

What to do above that level. If the insured person is buying term insurance for Rs 8 crores, it might be advisable to buy 4 policies of Rs 2 crores each, from the same company.

Why split it at all, once the rate has flattened. Because the premium is no longer the deciding factor, and a second consideration takes over: the split enables the insured to have the option to give up certain policies as the insurance needs come down in the future. Insurance need falls as goals are funded and dependants become independent, and four policies can be surrendered one at a time. A single Rs 8 crore policy can only be kept or dropped whole.

So the two halves of the rule pull in opposite directions, and both are correct. Below the insurer's telescopic ceiling, concentrate the cover to get the lower rate per thousand. At and above the ceiling, split the cover into ceiling-sized policies to keep the flexibility, still with the same insurer.

The disclosure duty that goes with holding several policies. The insurance proposal form should list all existing insurance policies and any pending proposals for life insurance with any other insurance company. This lets the insurer take an informed view of the total risk cover being sought against the insured's financial standing and need for insurance. Any omission to provide these facts might be treated as omission to provide a material fact, and may be grounds for repudiation of a claim or cancellation of the policy within the first 3 years after the policy is issued.

The workbook's own anchor figure. Its real-life pure protection example is a Rs 1 crore term cover for 30 years at Rs 9,416 a year. Rs 1 crore is 10,000 thousands of sum assured, so that premium works out to about Re 0.94 per thousand of sum assured.

The smaller-cover rate below is illustrative; the workbook states the telescopic principle but gives no rate table.

Four times the cover, from Rs 25 lakh to Rs 1 crore, for about 2.35 times the premium. That is what telescopic means.

Now split the same Rs 1 crore across four insurers, Rs 25 lakh each at the small-policy rate of Rs 1.60 per thousand:

Same cover, Rs 6,584 a year more, because every insurer priced its slice as a small policy. Over 30 years that is roughly Rs 1.98 lakh of premium thrown away.

And the Rs 8 crore case, which is the workbook's own. Suppose the insurer's telescopic rates stop at Rs 2 crores. A buyer wanting Rs 8 crores gains nothing further from one giant policy, so the workbook's advice is 4 policies of Rs 2 crores each, from the same company.

Ten years on, his home loan is repaid and one child is earning, so he needs only Rs 6 crores. He surrenders one Rs 2 crore policy and keeps three. Had he bought a single Rs 8 crore policy, he could not have reduced the cover that way.

One more thing he must do. Each of those four proposal forms must disclose the other policies and any pending proposals. An omission can be treated as failure to disclose a material fact, and the policy can be repudiated or cancelled within the first 3 years.

Chapter 2 (Features of Life Insurance Products), section 2.6, Benefits, Limitation and Provisions when insurance is taken from multiple companies, states the telescopic principle, the Rs 2 crores ceiling illustration, the Rs 8 crores split into four policies, the flexibility reason for splitting, and the proposal-form disclosure duty with the 3-year repudiation window. Expect the Rs 8 crores question directly: how should a large term cover be structured, and with how many insurers. The examinable words are per thousand of sum assured and same company.

• Telescopic means the RATE per thousand falls, not that the premium falls. The premium still rises with the cover, just not proportionately.
• Rs 2 crores is given as an illustration of a ceiling, for a particular company. It is not a market-wide figure, and the workbook says say Rs 2 crores.
• Both halves of the advice say same company. The Rs 8 crores split into four policies is a split across policies, not across insurers. Splitting across insurers loses the telescopic benefit.
• The reason for splitting above the ceiling is flexibility, not price. Once the rate has flattened there is no further discount to chase; what the split buys is the option to give up policies as the need falls.
• Do not confuse this with the health insurance per-lakh effect. Chapter 3 makes a similar point about health premiums per additional lakh of coverage, but that is a separate passage about indemnity cover and the sum insured.
• The disclosure duty is about existing policies AND pending proposals, with any other insurer.
• 3 years is the window for repudiation or cancellation on an omitted material fact, counted from issue of the policy.