The Dangers of Being Underinsured

July 21, 2021

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 has no life insurance coverage. It depicts that a major proportion of the population in India is having no coverage or under insured and thus, putting their family at a financial risk.

A major reason for this is that people are ignoring to 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.

What is Under Insurance?

Under Insurance implies that the life insurance that you have purchased is inadequate to cover the financial future for 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 into a 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 under-insured for Rs 30 Lacs.

Reasons for Under Insurance

Following are the key reasons for having an under insurance coverage.

  • Avenue to Save Tax: Most of the people perceive insurance as a way to save tax not to get a 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 that resulting to get an under-insured cover.
  • Agent Selling: When you buy a policy from an agent, he will offer you a product that provide him higher commissions rather than focusing on life insurance needs. It is one of the major causes for getting a low insurance coverage.
  • Wrong Product Choice: Choosing a wrong product may offer you an under 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 of your family, however, your family will receive a lesser amount on claim resulting they have to face a 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 Under-Insured?

It is important to find you are under insured, so you can avoid your family’s financial risk. Firstly, you need to calculate your insurance needs. According to thumb rule, the sum assured should be 15 times of your annual income, but it has several limitations. The sum assured chosen based on this rule does not prove adequate to fulfill 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 a right sum assured amount that will help fulfill financial obligations of the family.

After assessing that you have an under-insured coverage, it is recommended to buy a plan that can ensure an 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 an unfortunate event of your demise. This life insurance policy ensures a comprehensive coverage for your loved ones.


With an under 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 the complete financial security for your family.

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