One of the common problems in insurance is that sometimes policyholders pay unnecessarily more than they should because they insure the same asset with more than one insurer. Those who do it may do it deliberately or ignorantly with the former doing it for profit while the latter do it because they do not understand how insurance works. It is a form of insurance fraud to insure the same asset with more than one insurer with the intention of claiming compensation from all of them. The Commission urges the insuring public to desist from the practice of over-insuring. First, let us look at what general insurance is all about for you to have an appreciation of why we say you could be paying more than you should.
Principle of Indemnity
Insurance by its very nature is there to restore the insured person or business to where he or she was financially before the insured event occurred without causing a financial gain from the event. That is what indemnity means.
In simple terms, this means insurance is not for profit-making. It is simply there to take the insured person back to where he or she was before the loss.
Where multiple policies are common
The issue of multiple policies is common in funeral policies where siblings can put their parents on their individual funeral covers when the same parents already have their own funeral policies.
A case in point is where your father has a funeral policy that covers him and your mother. Then their three children add them both on their own funeral policies meaning that your parents are now covered by four policies yet when they pass on, only one policy is adequate to take care of the funeral. There is no way one can have four coffins for burial. What it clearly shows is that all the three siblings wasted their money paying premiums when their parents were already covered.
What needs to be done?
Whilst appearing to be planning for death may be considered taboo in some communities, it is critical that you discuss about it to establish who is already covered by whose policy to avoid wasting money that could have been used for other things. For instance, when you establish that your parents already have funeral cover, you can volunteer to upgrade the policy or pay health insurance for them, to cater for medical bills e.t.c instead of paying for what is already covered.
Where multiple policies are applicable
It is not all forms of insurance where the principle of indemnity is applicable. There are exceptions when it comes to life cover and health insurance. You can have multiple policies on life cover or health insurance because human life is priceless. In this case, one can have as many life cover policies as he/she can for the benet of his/her dependents in the event of death or permanent disability.
It is however, critical for you to have life cover policies that you can sustain in terms of paying premiums to avoid defaulting. For instance, if your income is $1000 per month, you should avoid having more life policies where you have to pay $300 or more monthly in premiums.
If you fail to continue paying some of the policies, they expire or lapse before maturity, which may see you not getting reimbursement. What that means is that you would have donated that money to the insurance company for nothing in return. It is therefore important that you only buy life policies that you
can pay for until maturity. Only life policies with a saving component may refund you on lapses before maturity.