Understanding Underinsurance

What Is Underinsurance?

Underinsurance means having an insurance coverage that is not sufficient to meet the actual financial loss that your family might face in your absence. In other words, when you buy a life insurance policy with a low sum assured than what you actually need, it can be said that you are underinsured.

Suppose your family would need about ₹1 crore to stay financially secure, but the life insurance policy you hold is worth only ₹40 lakh. In the event of your absence, that gap leaves your loved ones without enough to manage expenses like education costs, repay debts, if any or maintain their standard of living.

Characteristics of Underinsurance

Some of the characteristics of underinsurance are as follows –

• You have a low sum assured
• The sum assured is not in line with the increasing expenses due to inflation.
• In the case of a claim, the payout from the policy will not be enough to meet the financial requirements.
• You cannot fulfil your financial goals with the existing coverage of your life insurance policy.
• In your absence, the benefit paid by the life insurance policy would not be sufficient to cover your family’s financial needs.
   

What happens when you are underinsured?

When you are underinsured, you might face the following challenges –

1. In your absence, your family might get a limited financial payout. This payout might not be able to cover their basic lifestyle expenses for future years, let alone the unfulfilled financial goals
2. Even if the coverage is suitable for meeting everyday living costs, it might not give your family the funds to fulfil their financial goals
3. If the life insurance policy does not provide the financial security it should, you or your family might be forced to take out a loan to fulfil your needs
4. Low coverage might cause a financial strain in emergencies
    

Reasons for being Underinsured

Some reasons behind underinsurance are discussed in the points below –

1. Low or no awareness

   Many individuals might not be aware of the importance of buying a suitable life insurance policy. They might not understand why life insurance is important and why they should have adequate coverage. They might buy a policy simply to save tax or on the advice of their peers or family without understanding its benefits.

   
   

2. No need analysis

   When you buy life insurance, it is recommended to do a financial need analysis to understand the corpus that you need for your goals and financial needs. In the absence of need analysis, you might not find the right coverage for your life insurance plans.

   
   

3. Unaffordability

   Individuals looking for an adequate sum assured might not opt for it because of the associated premiums. If the sum assured rises, the premiums also increase. Such high premiums might prove unaffordable for policyholders, and they might choose lower coverage to keep the premiums affordable.

   
   

4. Mistrust

   Many individuals might also not trust insurance agents or companies to help them in times of need. Misselling or dishonest agents might be a reason for the mistrust which keeps individuals from buying the right coverage amount in their life insurance policies.

   
   

5. Inflation

   Inflation increases the cost of goods and services and might make the existing coverage insufficient to cover the enhanced financial needs.

   
   

How do you identify when you are underinsured?

Many people don’t realize they are underinsured until a claim is made. The best way to avoid this is to identify whether your insurance coverage is enough. Here’s how you can do that -

1. Reviewing your sum insured vs. actual needs -

   Over time, expenses, debts, and lifestyle needs change, but life insurance policies often stay the same. If your sum insured hasn’t kept pace with your current financial responsibilities, chances are you’re underinsured. Compare the coverage stated in your policy with what would actually would be required to cover your family’s lifestyle expenses, outstanding financial liabilities, and financial goals in case of your untimely demise. If there is a noticeable gap between the two, it indicates underinsurance.

   
   

2. Using online insurance calculators

   To understand whether you are underinsured or not, you can use an underinsurance calculator. Bajaj Life Insurance offers a free underinsurance calculator to help you decide whether your existing coverage is ideal or not. Use the calculator and enter your details to check the right coverage amount. Compare your existing coverage with the calculated amount and find out whether you are underinsured or not.

   
   

3. Consulting with an insurance advisor

   Speaking to a qualified advisor helps you understand whether your current cover matches your family’s actual needs. They can walk you through your options, point out gaps, and suggest the right sum assured.

   
   

Who is most likely to be underinsured?

Individuals who lack awareness of the importance of life insurance or those who ignore choosing the right coverage are more prone to being underinsured.

Moreover, individuals who have just begun their careers might not understand the right insurance coverage that they need. Even if they do, they might not have sufficient funds at their disposal to afford the premiums. They can be underinsured.

Individuals who do not review their life insurance policies regularly are also at risk of being underinsured. As inflation increases the corpus needed to fulfil your financial goals, it is better to check whether the existing life insurance policy is sufficient to cover your increased needs. If you don’t check, you might stay underinsured.

Myths About Underinsurance

There are many myths around underinsurance that lead people to believe their cover is adequate when it isn’t. Understanding these myths is key to recognizing how underinsurance can affect your financial security.

1. Any life insurance policy coverage is enough

   Having a policy doesn’t automatically mean you’re protected. If the sum assured is lower than what you actually need, your family will have to face financial issues in your absence. True protection comes only when coverage matches the real financial needs.

   
   

2. Small savings on premiums don’t matter

   Opting for a lower premium by choosing lower coverage may feel like a smart saving, but it creates a bigger risk. During a claim, the payout might cover only part of the loss, forcing you to fund the rest yourself. Over time, the cost of being underinsured far outweighs the premium saved.

   
   

3. Such risks are rare

   Many believe serious illness, accidents, or untimely death are rare events. But when they do happen, the lack of sufficient life insurance can devastate a family’s finances. Underinsurance may often be discovered only when it’s too late to fix.

   
   

How to prevent from being Underinsured?

To avoid underinsurance in life insurance, here are a few tips –

• Use the life insurance calculator to find the right coverage based on your financial details. Choose a coverage which matches the calculated amount. The basic thumb rule is to have a cover which is at least 10X your annual income1. For instance, if your annual income is ₹10 lakhs, a minimum coverage of ₹1 crore is a must.
• If you cannot afford a high premium at once, you can supplement your life insurance policy later on when your income increases.
• Review your life insurance coverage regularly, at least once a year. Check whether it is sufficient to cover your changing needs.
• If your financial goals increase, try to increase your coverage level too. For instance, after you get married, it is better to increase the sum assured since your responsibilities increase.

In other types of insurance policies, here’s how to avoid underinsurance –
 

Health insurance

In health insurance plans, assess the average hospitalisation expenses that you might incur in the case of illnesses or injuries. Try to opt for coverage which would suitably cover such hospitalisation and treatment costs.

Home Insurance

There are different type of home insurance, one of which is building insurance which covers damages to the physical structure of your home and where the value of structure insurance should be close to your home’s value so that in the case of damages, the policy can pay for the cost of repairs or renovations or even to rebuild, if necessary. Similarly, another type is content insurance, wherein, aggregate the value of household content being insured needs to be considered to choose a suitable amount.

Key Takeaways

• Underinsurance means your policy coverage is not enough to meet your family’s financial needs in your absence.
• A low sum assured, lack of need analysis, inflation, or affordability concerns are common reasons for being underinsured.
• The greatest risk of being underinsured is that your family might not receive sufficient financial support when it's needed the most
• Review your life insurance policy regularly, especially after milestones like marriage, children, or new loans.
• Use online insurance calculators and professional advice to check if you are underinsured and need more coverage.
   

Conclusion

Underinsurance defeats the purpose of life insurance and is best avoided. So, if you have an existing insurance policy, check whether the coverage is sufficient. If not, supplement your coverage with a new policy and be adequately insured. On the other hand, if you don’t have life insurance, use the life insurance calculator to find the ideal coverage amount. Choose a coverage that matches the calculated amount and ensure complete financial security.

FAQs

1. What is the cost of using the underinsurance calculator?

   The underinsurance calculator offered by Bajaj Life Insurance is completely free of cost. There is no charge for using it.

   
   

2. How can I make the premium more affordable?

   To make the premium more affordable, you can pay it semi-annually, quarterly or monthly. Moreover, you can buy the policy at a younger age to lock in low premiums.

   
   

3. How do I find out whether I am underinsured?

   You can use the online underinsurance calculator offered by Bajaj Life Insurance and find out if you are underinsured. Enter your financial details in the calculator for instant calculations – your expenses, savings, existing assets and liabilities and current policies. Based on this information, the calculator will calculate whether you are underinsured and if you are, by how much.

   
   

4. Is being underinsured and uninsured the same thing?

   No, being underinsured is different from being uninsured. In the former, you have an existing life insurance policy, but the coverage is not sufficient. However, in the latter, you don’t have any life insurance policy at all.

   
   

5. How does underinsurance affect claim payouts?

   When you are underinsured, the claim payout from your life insurance may not be enough to cover your family’s actual financial needs. This shortfall can leave them struggling with expenses, debts, and long-term commitments.

   
   

6. Can underinsurance be corrected mid-policy?

   Usually, most life insurance policies do not allow increasing the sum assured once the coverage has started. However, some insurers offer a life stage benefit under few plans. This benefit can be selected when you buy the policy and it can allow you to increase the sum assured at different life stages like marriage or childbirth. You can check the policy document or brochure to understand if your policy offers the facility to increase the sum assured and optimize your coverage mid-term. Alternatively, you can buy a new life insurance policy to supplement your coverage.