How much insurance do I need? Being under-insured can even put life at risk; 4 critical things to know

Published: October 3, 2017 1:22 PM

The main reason behind under insurance is lack of awareness and knowledge. Due to this, the insured remains exposed to a number of dangers.

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By Naval Goel

Everyday when we step out of our safe zones, we take a risk by being underinsured or non-insured at all. Our country is blatantly ignorant about the significance of life and non-life insurance. Being underinsured creates a hoax illusion of protection, while it actually is equivalent to no protection at all.

The plight of under insurance is widely prevalent in our country. The mindset of a proactive and safe existence is not encouraged from the very beginning. Thus, even though the insurance sector, particularly life insurance, has seen a rapid upsurge in the last decade, the penetration of life insurance in India is merely around 3%.

What Does Being Underinsured Imply?

Under insurance refers to being insured less than required. It means the plans that one subscribes to are not adequate to financially back the future of the insured and the family. Quoting in numbers, a life cover less than one crore is considered insufficient.

Under insurance is a common issue when it comes to insurance of household contents or any personal belonging.

Why One Overlooks The Risks Of Being Underinsured?

1) One of the major causes of under insurance in India is widespread ignorance. The masses tend to ignore the hazards of being ill-prepared for any unpredictable serious tragedies of life.

The following areas of insurance are generally ignored due to the mentioned reasons:

# Fire insurance is subscribed majorly for commercial contents, not for households.

# Vehicle insurance is considered with seriousness only for documentation reasons.

# Medical insurance has still not been able to create extensive reach among the populace.

# The coverage of life insurance is utterly dissatisfactory. Handfuls of people contemplate about getting term insurance plans. Even if they do, it is mainly for availing tax exemptions and other tax-saving benefits. It is never taken with the real objective. People never buy it as an aid that will come as a rescue to them during the times of emergency.

# Another reason is that people look at the premium amount initially and usually end up being under insured by considering plans with smaller premium payments. Such plans usually fail to provide enough coverage to the insured.

# Travel insurance could be proven as an immensely useful financial aid for a frequent overseas traveler. Still, it has not gripped grounds, nor is promoted properly.

# Kidnap and ransom insurance can also be useful in extreme cases where criminal acts like kidnapping and abducting take place, especially at a foreign location. It is also widely avoided.

2) The primary reason for the leniency and lax attitude is ignorance and lack of ability to foresee a safe and secure future.

3) Another reason is poor promotion and creation of awareness. An insurance agent sells insurance plans mainly with the motive of earning the maximum commission. Thus, he induces people to buy expensive term insurance plans that provide insufficient coverage and lead to under insurance.

4) Also, people usually end up investing in the wrong product which proves insufficient and renders them under insured. For example, if an individual buys a life insurance policy that offers a cover up to Rs 1 crore through Unit Linked Insurance Plans (ULIP), the premium will be more, and it will be difficult to continue that plan running in the long run.

What Risks Does Being Underinsured Pose?

As mentioned above, the main reason behind under insurance is lack of awareness and knowledge. Due to this the insured remains exposed to a number of dangers.

# For example, in a business, being underinsured poses threat to the business’ entire financial existence. A single incident causing loss takes place, and no matter how trivial, it can be disastrous if the business is underinsured. Thus, it receives an insurance payout series following the loss incident that is insufficient to return the business to normalcy and stable financial standing.

# In case of under insurance of housing and property, for example, if the insurance plan is for Rs 100,000 and the full cost to repair and rebuild the house is 150,000, then here it implies that you have only insured 2/3rd of the total cost. So in case there is a fire accident, and the rebuilding cost is 60,000, the insurance provider will only cover the 2/3rd of 60,000, i.e. 40,000 only since you are only insured for 2/3rd of the rebuilding cost. Thus, the insurer may have to bear a reduced pay-out trivia. Policies normally include an element of the average clause. It means that the insurance provider can cut down his liability during claim settlement by applying a proportionate formula or by ‘applying average’. When the average is applied the amount paid as the claim will in proportion to the actual loss occurred, as the sum insured is attributable to the full value of the property.

# Another risk it poses is while making a claim. When there is no claim during the tenure of insurance, the insurer may declare the policy void and cancel the entire agreement by refunding all the premium amounts that are paid. They may even recall any amounts that are paid out for previous claims.

Taking A Step Towards A More Secure And Wholesome Life

The following measures can be taken to avoid being under insured and at a financial risk:

# Analyze If You Are Under Insured

If the answer is yes, then you need to bridge the gap. For example, if you have already subscribed to a non term life insurance plan, then one must fill the gap by buying a term plan which is more comprehensive.

# Doing The Necessary Homework

Buying a life cover out of sheer ignorance can render one under insured. To prevent this phenomenon, one must calculate the required sum assured and premium amount according to the income, expenses, liabilities, etc. For example, generally people opt for plans that offer coverage of worth 15 times their monthly income.

# Valuation Of Possessions

In case of household contents, one must value the assets and how much it would cost to replace or rebuild them.

(The author is CEO & Founder, PolicyX.com)

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