Life Insurance

The Dangers of Being Underinsured

Nov 27, 2021

Buying a life insurance plan is of utmost importance. However, it is very important for you to buy insurance that is sufficient and suitable enough for your family. You, therefore, need to assess your needs and see how much insurance is needed for the financial wellbeing of your family in case you die unexpectedly. 

If you buy a high cover, it will become redundant. If you buy too little insurance cover, you will end up suffering. 

Read on to know more about the effects of being underinsured.

Before we discuss the risks associated with underinsurance, let us first understand what it means to be insured and what it means to be underinsured. 

What is insurance and what is underinsurance? 

Underinsurance is nothing but having a life cover that is too small and insufficient. Life insurance is a fund that you have. This fund is paid to your family in the event of your death by the life insurance company. And, on the maturity of the life insurance plan, you get maturity benefits as per the plan.

In return for this policy contract, you pay a premium to the insurer and the insurance company promises to provide the sum assured to your nominee(s) if you die within the policy period and at the policy tenure, maturity benefits (if any) to you, depending on the plan. 

 Therefore, you need to have an adequate life cover that will prevent your family from falling into financial trouble after you are gone. When you have a life cover that is not adequate enough for this, it is called being underinsured. 

The risks associated with being underinsured 

Here are some problems you or your family may face when you have life insurance that is too less and insufficient:

  1. The financial risk to your family - (For loss of income)
    You will be risking your family’s financial wellbeing if you stay underinsured. If anything unexpected happens to you, your family should receive the highest possible coverage so that they can carry on with their livelihoods without having to compromise on anything.

     
  2. Not enough to cover debts - 
    Another reason why people get life insurance is to cover their debts. You need to have a life cover that is large enough to cover all your loans and mortgages so that if you die without repaying them, your family should be able to use the death benefit and clear the dues. If the sum assured received is too low, they will struggle to pay the EMIs and your family may end up losing important assets.

     
  3. Unhelpful for wealth creation - Future financial goals may suffer
    Many people buy a life insurance plan as they want to combine the elements of insurance and investment. However, if you invest too little in the policy, your dividends will also be lower and you won't be able to save up enough. Keeping this point in mind, you should look to have a life insurance plan that is sufficient and large for all your needs.

     
  4. Not enough tax saved - 
    If you have a very small life cover, the premium you pay will also be quite low. You will not be able to make sufficient tax savings from such a plan. This will be of waste as you can save up to INR 1.5 lakhs income tax each year by paying your life insurance premium.

These are the dangerous reasons why your life insurance cover should never be insufficient.

Top #5 Ways to ensure you have enough life insurance

So how do you get enough life insurance?  The answer is quite simple. All you have to do is assess the following parameters:

  1. Step 1: Analyse the requirements of your family - 
    Start off by seeing what the exact economical requirements of your family are. If you have a large family, you will need a larger cover. If you have a small nuclear family, a smaller cover would suffice. Then, you need to see if someone in your family has extra financial needs such as the medical needs of an ailing parent or child’s education. Keeping these factors in mind, you must choose the correct coverage amount for your life insurance policy.

     
  2. Step 2: Analyse the income of your family - Next, you need to see what the other incomes of your family are. If your family has other sources of income such as your spouse’s salary, parents’ pension, etc, your life cover may be smaller. However, if you are the only breadwinner, then you will have to go for a larger life cover to ensure there is no scope of underinsurance.

     
  3. Step 3: Pick A Cover According to Your Income - 
    Most financial experts advise that to calculate an adequate amount of your life insurance cover, you should multiply your current income by 10 or 15. So, basically, you should have a life insurance cover which is 10 or 15 times your current annual income. You would be able to ensure that after you are gone, your family would be able to maintain the standard of living.
     
  4. Step 4: Cater for Inflation -
    Another important aspect that you must keep in mind is inflation. An amount that may seem enough today, maybe hardly anything a few years from now. With the way inflation is causing a price rise just about everywhere, you must insure yourself for an amount that helps your family beat inflation.
     
  5. Step 5: Keep an eye on the budget - And finally, keep an eye on the price of the life plan you choose to buy. While it is important to have a large cover, do not opt for a large plan that is very expensive, you will struggle to pay the premium in that case. Find a balance and get a plan that is comprehensive yet affordable.

Once you correctly assess these factors, you will have the best life insurance cover which will be sufficient for your family. Underinsurance is harmful and you must always stay away from it.

Best time to buy an insurance plan

Many people remain underinsured because they are not able to afford a large life insurance cover. To avoid this, you must buy your life insurance plan earlier in life. There are several benefits of doing so. Thus, you should buy life insurance as early on in life as possible, maybe even in your 20s or 30s. The advantages you get on doing so include:

  • High cover at low cost - You can buy life insurance at a cheaper rate when you are young and fit. This makes it easy for you to buy a larger life cover and stay away from the dangers of underinsurance. 
  • Opportunity to increase cover - If for some reason you are compelled to buy a smaller life cover because of premium constraints, you can increase the life cover on the same policy as you age. This helps you to overcome the problem of underinsurance. This is another benefit you get when you buy life insurance at a young age.
    Almost all life insurance companies allow you to increase the sum assured at later stages of life, mostly without a medical screening. For example, you purchased a life cover of INR 50 lakhs as a bachelor. After getting married, you can increase it by 50%. You can further increase it by another 25% at the birth of your child. Obviously, as the coverage is enhanced the premium would also be raised. Your premium amount would be re-calculated on the basis of your age, the sum assured and also the policy tenure. Some insurance plans may put a cap on the sum insured.

These are the main benefits you get when you buy life insurance at an early age, preferably right after you join your first job and start earning an income. This allows you to have sufficient life insurance and also to add more insurance if needed later on in life. It protects you from the dangers of underinsurance as well.

In conclusion 

If you ever feel you don't have enough life insurance, get it rectified at the earliest and buy a larger life cover. If financial constraint is your reason for buying less insurance, look for smart options such as the term insurance plans that offer a high cover at a low rate. You can buy term insurance and safeguard yourself against the dangers and risks of underinsurance.

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