Consumption of large amounts of alcohol might deny you cover

Published in Mint on 25th February 2014, Written by Kapil Mehta
I will be going abroad for around seven years. I want to know whether I can pay my premiums through cheques from my account there.
—Jayanti Bose
Insurers generally prefer that you pay in Indian rupees. Paying in foreign currency is possible but comes along with considerable reporting and documentation requirements. If you have an active bank account or credit card in India, you could issue standing instructions. If you must pay from overseas, then online payment or electronic transfer will be easiest to do. Overseas cheques are not that prevalent nowadays.
Will the amount of alcohol I consume affect the premium of a term life policy? Can an insurer refuse to give me insurance if I consume alcohol?
—Shyam Nambiar
The insurer’s response will depend upon the sum assured you select, amount of alcohol you drink, your general health and, more specifically, the condition of your liver. Insurers will look into your drinking more if the sum assured is high; you drink large amounts and often, your general health is poor or your liver function tests are not normal. Then, they may increase your premium or turn down the insurance. Practically speaking, in most cases, moderate social drinking isn’t an issue.
How do I decide how much life insurance cover I need to take?
—Kavya
There are several approaches to assess the amount of insurance needed. The first approach, which I endorse for its simplicity, is to purchase enough cover so that if you were to die today, your family will immediately get an amount equal to 10 years of your annual income. This is a long enough term for the family to settle down and create alternate incomes without compromising their quality of life.
A second approach is to estimate specific expenses that the family would incur over the foreseeable future and purchase enough insurance to cover that amount. The sum assured estimated in this approach is usually less than the first method. Be mindful of the tendency to underestimate expenses and make sure you build in inflation. A third approach is to construct a list of your current assets, current and future liabilities. The difference between your liabilities and assets is the funding gap that needs to be bridged with insurance. This is a relatively complex exercise because interest rates and inflation needs to be factored. Follow this approach if you are comfortable with financial modelling and computing the time value of money.