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Home >Money >Personal Finance >Annual income is a key factor while buying term life insurance

Have you ever wondered that while buying a term life insurance policy, the insurer asks you to mention your annual income in the application form? Moreover, you cannot skip it because it is a necessary step.

“It is mandatory for insurers to ask for income proof when you buy a policy, not just online but offline as well. The income of the applicant is one of the primary criteria on which the company decides whether to offer insurance or not. Hence, you must be prepared with proof of income before you apply for life insurance," said Santosh Agarwal, chief business officer (life insurance), Policybazaar.com.

There are several reasons why an insurance company asks that question. One is that life insurance is considered to be income replacement, and the insurer wants to know how much you earn so that the coverage you are obtaining relates to the income that would get replaced on your demise as a death benefit.

“Besides, income proofs are necessary as they show your commitment to pay the premiums on time. When you are getting yourself insured, the insurance company needs to know your financial situation to assess your earning capacity, your financial earnings projections and whether you would be able to pay the premiums or not. This is why insurers prefer salaried individuals as they have a stable income and a higher chance of not defaulting on premium payments," Agarwal said.

“Other details such as the number of years in service and designation also make a difference, especially if you are in the high-risk job category. This is based on the assumption that with seniority and experience, the amount of manual work is expected to fall, along with the exposure to hazard," Agarwal said.

Moreover, your financial statements help the insurer decide on the sum assured or the total life coverage that can be offered to you. It avoids the possibility of over-insurance, wherein the policyholder has bought coverage more than the actual cash value. This might be a hazard for the insurer and can result in the denial of an insurance claim.

“The insurance company, in case of over-insurance, can suffer many losses as the insured may be tempted to make a false claim to gain profit from the loss insured at overvalue. Over-insurance results in compensation to be paid by the firm in excess of the actual loss incurred by the insurer either by false claims or due to overvaluation of the insured assets," Agarwal said.

Thus, in case of a discrepancy in the income declaration, the policy can lapse, and an insurance claim might be denied. Therefore, submitting income proof while purchasing the term insurance protects your beneficiary against the policy claim rejection.

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