Why low insurance is more dangerous than no insurance

Life insurance is among the favourite saving avenues for Indian investors. Yet, India is grossly under-insured. This is because insurance buyers prefer policies that have a larger investment component and minimal risk coverage. The average life insurance policy offers a cover of a little over Rs 1 lakh.

This amount is grossly inadequate. One needs to have enough insurance so that in case of one’s untimely death, the family gets a sum large enough to pay off liabilities and generate an income to live comfortably. Unfortunately, many Indians believe that buying an insurance policy is synonymous with having adequate cover. However, under-insurance is even more dangerous than having no insurance. This is because the insured person is lulled into a false sense of security.

How much insurance does one actually require? Though there is no hard and fast rule on this, you can carry out a simple calculation (see How much cover…) to get a rough idea about your insurance needs.

In the example used in the table, the person earns well, but is not adequately insured. In case of his untimely death, the family will be in a financial mess, with outstanding loans of Rs 33 lakh. His existing insurance of Rs 10 lakh will hardly suffice.
A term plan can fill the gap between the insurance one has and the cover one needs. Of late, we have seen a lot of action in pure protection plans. In its simplest form, a term plan is a contract that promises to pay a fixed sum to the nominee if the insured person dies. Since there is no survival benefit, the cost of cover is substantially low compared to the other forms of insurance.

The advent of online term plans has made it easier for people to buy insurance. All it takes is 20-25 minutes of filling up online forms to secure your family’s financial future. You can also add riders like a cover for critical illnesses and accidental death.

Unfortunately, most people are in the same boat as the hypothetical example used above. Make sure you and your family don’t end up in a similar situation.

(The author is Chief Marketing Officer, Aegon Religare Life Insurance)

 

Yateesh Srivastava, http://economictimes.indiatimes.com/personal-finance/insurance/analysis/-why-low-insurance-is-more-dangerous-than-no-insurance/articleshow/12390824.cms