A few years back, a close relative of mine expired at the young age of 44. He left behind his wife and two young kids. The untimely and unexpected loss was emotionally devastating for the family. But there was another angle to this loss. The financial angle.
He was the sole earner of the family, was living on rent, his spouse was a home maker, children’s school education and higher education were still not complete.
The worst part: he had an insurance cover of just Rs 5 lakh.
Imagine the situation for the dependents. The sole earner of the family is no more and only Rs 5 lakh as compensation. This is what underinsurance results in.
Under-insuring yourself is unacceptable
Just imagine a hypothetical situation where this person would have had a life insurance cover of Rs 1-2 crore. The money then received would have helped the family immensely. They could have bought their own house, paid for children’s education and have sufficient money for their regular expenses.
If you think about it, being underinsured is a sort of crime against your own family.
How could it not be? It’s like not planning for your family’s well-being properly. And that is not right if your family depends on your decision-making and income.
Most Indians commit the same mistake. They are underinsured. Many of you readers would also be underinsured.
Given the fact that term insurance is so cheap, it doesn’t really make sense to not have a large life cover these days. Just a few thousand rupees a year can get you a crore worth of insurance cover.
And at times, the reason given for not having proper insurance cover is that ‘I am not dying tomorrow, so why worry?’
A vast majority still believes or rather buys life insurance to save taxes. They still don’t understand that buying a cover of a few lakh will be grossly inadequate for their family in case of their demise.
Lack of awareness
In India, the first problem is that there is an under penetration of insurance. And second is that those who have insurance, do not have the right coverage amount. They are underinsured. Underinsurance is where the life insurance cover is not enough to take care of all the financial needs of the dependents.
Let’s take a typical example. Suppose a person who is the sole earner of the family, has savings of Rs 15 lakh and a life insurance of Rs 5 lakh. So in case of his death, the family will have access to a total of Rs 20 lakh only. Now will this Rs 20 lakh be enough for taking care of children’s higher education, house purchase (or loan closures) and regular expenses for several years? The answer is no. It will be inadequate.
Many people are covered under small life cover provided by their employers too. But assuming that it alone will be sufficient is also not right.
Another major reason for underinsurance in India is the trend to mix insurance and investments. People opt for products that combine insurance with investments (like traditional endowment or moneyback policies). And these hybrid products offer very low coverage for the premium charged. Like a Rs 5 lakh cover might cost Rs 25-30,000 annually. Having spent a large amount on premium people have this wrong feeling of being properly insured. But that’s not the case.
What should you do if you are underinsured?
First, check your own situation and accept that you are under insured. The next step is to find out how much insurance coverage you actually need. To get a rough estimate, do the sum of the following:
-Outstanding loan amounts
-Present Value of goals like children’s higher education, marriage, house purchase (if still not purchased), etc.
-An amount that can generate regular monthly income.
The sum of all these will give you an approximate of your gross insurance requirement.
To arrive at your net insurance requirements, you can subtract your existing savings and investments from the gross figure. This will give you the amount of additional cover that you need to purchase.
And please don’t randomly go and buy a Rs 1 crore cover as that is the one everyone else is buying. Your requirement may be different from what others might need.