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Is your insurance cover too little?

An age-old question I still find relevant:  Are you adequately covered by insurance? Did you just say a yes?  Wow! Are you sure? Now, that is a million-dollar question: How can you be SURE that you are adequately covered?

The insurance sector in India has been showing dismal figures with penetration levels falling over the years. The industry recorded a penetration level of 3.3% in Financial Year 2014-2015 which declined from the earlier level of 3.9%. According to the Swiss Re Sigma Study, India ranks 15th in premium collection among other nations. Despite having such a large population, why do the figures present such a dismal image and why is the ranking so low?


One of the primary reasons for the decline in penetration levels is the lack of awareness among the common masses. Most people avoid buying insurance and even if they do, the chosen covers are almost always insufficient. Is having a Rs. 1 lakh or Rs. 2 lakh worth of policy enough? Is your insurance cover sufficient or too little?

When we talk about the common population, almost all of us are underinsured. The reasons are several. Let’s have a look:

  • Affordability – where the middle class is struggling to make ends meet in the face of rising inflation, having considerable coverages is the last thing on the planning list. People generally make do with the lower coverages since it entails lower premiums.

  • Lack of Awareness – insurance is an intangible product with benefits available in the longer run. Thus, the awareness of its importance is absent from the minds of the general masses and even those who know the importance are clueless about the optimum coverage levels.

  • Lack of Trust – with the privatization of the insurance sector, there has been a lot of mis-selling on the part of agents thereby lowering the trust people would have on private players. Despite attractive plans, people shy away from investing in plans offered by private insurers.

Lack of trust can be overcome by good propaganda and customer education on the part of the insurance industry while affordability factor can be overcome through gradual increment in coverage with increasing income. However, lack of awareness is something that needs to be tackled through proper information and only then will people realize the value of insurance and the optimum cover.

When talking about the optimum level of cover, industry experts have devised various methods such as:

  • Need-Analysis Method – experts are of the opinion that every individual has different needs and thus no one universal amount can determine the optimum cover. For instance, the financial needs of Sachin Tendulkar will be different from that of Mr. Verma, a middle-class man. Thus this approach factors in the present and future needs, weighs it against the existing assets and liabilities and determines the optimum cover level.

  • Human Life Value Method – here, the human life is estimated in economic terms using the current level of income and expenses of a person. Suppose, for a single income family with the annual expense of 3 lakhs, there should be a provision of such a corpus which when invested in a bank deposit yields an amount equal to the annual expense even in the absence of the bread-winner. If the bank rate is assumed to be 8%, a corpus of Rs. 38 lakhs (approx.) will be sufficient for the family’s basic financial needs.

  • Income Level Method – the crudest method for those who want an easy answer is the income method where the optimum cover is determined as a multiple of the annual income. The multiple generally ranges from 10-12 times.

In the words of TR Ramachandran, CEO and MD of Aviva India, “Insurance addresses four key needs in a customer’s economic life cycle, which include savings, protection, investment and retirement.” It is correctly remarked because the importance of insurance cannot be gainsaid be it health insurance or life insurance. At the same time having a sufficient cover is also imperative because the advantages of insurance cannot be felt with a minimal cover. So use any of the above mentioned methods but be sure to have a sufficient level of cover.


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