Benefits, Limitation and Provisions when insurance taken from multiple companies

Clients often purchase policies from different insurers to benefit from varied product features such as higher sum‑assured limits, specific riders, or better premium payment options. For example, one insurer may offer a low‑cost term plan while another provides a comprehensive ULIP with market‑linked returns.

Another common motive is to mitigate insurer‑specific risk. If an insurer faces solvency issues, the client’s entire coverage does not vanish because part of the protection resides with other, financially stronger companies.

From an advisory perspective, the exam tests whether you can recognise these motivations and advise clients on optimal allocation of premiums across insurers while maintaining overall protection adequacy.

• Product‑feature diversification
• Insurer‑risk mitigation

Feature diversification: Different insurers specialise in distinct product types. By spreading policies, a client can combine the low premium of a term plan with the investment component of a ULIP, achieving both protection and wealth creation.

Enhanced claim settlement confidence: In case of a claim, the client is not wholly dependent on a single insurer’s claim‑processing efficiency. This can be crucial in time‑sensitive situations such as medical emergencies.

Regulatory safeguards: IRDA‑I mandates that each insurer maintains a minimum solvency margin. Holding policies with several insurers diversifies the solvency risk, aligning with the advisory principle of risk mitigation.

Exam‑wise, questions often ask you to select the best justification for recommending multiple policies. Look for options that mention diversification of features, risk spreading, and compliance with suitability norms.

Higher aggregate premium: Paying premiums to several insurers increases the total outflow, which may strain the client’s cash‑flow if not budgeted correctly. Advisers must calculate the client’s disposable income before recommending multiple policies.

Policy overlap and over‑insuring: Duplicate coverage can result in a sum‑assured that far exceeds the client’s actual need, leading to wasteful expenditure. The NISM exam frequently tests the ability to identify over‑insuring through a simple needs‑analysis calculation.

Administrative complexity: Managing renewal dates, premium payments and claim documentation across multiple insurers raises the chance of missed payments or delayed claims, which can erode the intended protection.

Remember that the adviser’s duty of care includes simplifying the client’s portfolio. If the benefits do not outweigh the costs, the correct exam answer will favour a single, well‑structured policy.

IRDA‑I’s Insurance Act, 1938 (as amended) requires insurers to disclose any existing policies the applicant holds with other insurers during the underwriting process. This helps prevent adverse selection and ensures accurate risk assessment.

Advisers must obtain a signed declaration from the client stating the number of existing life‑insurance policies, their sum‑assured and premium amounts. Failure to collect this information can lead to regulatory penalties under SEBI’s advisory code of conduct.

For the NISM exam, remember the two key provisions: (1) mandatory disclosure of existing policies, and (2) the insurer’s right to request a “Policy Statement” from the client’s previous insurer for verification.

Under SEBI (Investment Advisers) Regulations, 2013, an adviser must ensure that the recommendation of multiple policies is suitable to the client’s risk profile, financial goals and liquidity needs. This includes a written suitability report that outlines the rationale for each policy.

The adviser must also disclose any conflict of interest, such as higher commissions from a particular insurer, and obtain the client’s informed consent before proceeding.

Exam questions often present a case where the adviser recommends an additional policy without assessing the client’s total premium burden. The correct answer will highlight the need for a holistic needs‑analysis and proper disclosure.