The insurance penetration level in India stands at 3.9%, which is below the world average of 6.3%. According to an estimate, over 80 crore people in India have no life insurance coverage. It depicts that a major proportion of the population in India is having no coverage or is underinsured and thus, putting their family at financial risk.
A major reason for this is that people are ignoring buy term insurance plans. Here, it’s become important to understand the consequences of under insurance. The low insurance density in India needs to be addressed properly by opting for adequate life insurance coverage that can ensure a secure future for your family.
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What is Under Insurance?
Under Insurance implies that the life insurance that you have purchased is inadequate to cover the financial future of your family. In case of a claim, your family will receive a sum assured amount which is not enough to fulfill various financial requirements of the family. It only puts your family at serious financial risk and they have to put off their dreams and desires, due to under insurance.
For instance, you have a life insurance coverage of Rs 20 Lacs, however, the insurance cover that you need is Rs 50 lacs. Then, you are underinsured for Rs 30 Lacs.
Reasons for Underinsurance
Following are the key reasons for having insurance coverage.
- Avenue to Save Tax: Most people perceive insurance as a way to save tax not to get risk cover. They only buy a life insurance cover to get the tax benefit and don’t assess the insurance needs appropriately before buying it resulting to get an underinsured cover.
- Agent Selling: When you buy a policy from an agent, he will offer you a product that provides him higher commissions rather than focusing on life insurance needs. It is one of the major causes of getting low insurance coverage.
- Wrong Product Choice: Choosing the wrong product may offer you insurance coverage. If you buy a ULIP plan for a high life cover such as Rs 75 Lacs, it is hard for you to afford the premiums.
Risk Involved in Underinsurance
The biggest risk of underinsurance is that you perceive a secure future for your family, however, your family will receive a lesser amount on a claim resulting in them having to face severe trouble in fulfilling the financial obligations such as children’s education, re-payment of debts, regular household expenses, etc.
The premium amount you pay for a life cover will go in vain, as it does not fulfill the purpose of financial security for your loved ones.
How to Identify You are Underinsured?
It is important to find you are underinsured, so you can avoid your family’s financial risk. Firstly, you need to calculate your insurance needs. According to the thumb rule, the sum assured should be 15 times your annual income, but it has several limitations. The sum assured chosen based on this rule does not prove adequate to fulfill the financial needs of the family.
For calculating the insurance needs, you can sum up the outstanding loan amount, child’s higher education & marriage expenses, regular household expenses, or other financial obligations. It helps you to choose the right sum assured amount that will help fulfill the financial obligations of the family.
After assessing that you have underinsured coverage, it is recommended to buy a plan that can ensure adequate insurance coverage. Buying a term insurance plan is the best option to achieve this objective.
A term plan provides a pure life cover and the insurance company pays the chosen sum assured amount to your family, in the unfortunate event of your demise. This life insurance policy ensures comprehensive coverage for your loved ones.
Conclusion
With insurance coverage, your family will receive an amount, which is inadequate to meet their financial obligations and they have to face a severe financial crunch after your demise. It’s an urgent need to assess the needs of your family and choose the right life cover. Choosing a term plan with an adequate life cover is an optimal solution to ensure complete financial security for your family.