Are You Underinsured? These 5 Signs Might Say YES

Sanjay got a big scare when a routine health check-up revealed a mass in his lungs, prompting additional testing. At 32, he had no prior history of health issues, and this development left him unprepared. Thankfully, the mass turned out to be non-cancerous, and no expensive medical procedure was necessary. Nonetheless, this experience prompted Sanjay to recognize that his existing health insurance wouldn't have been sufficient to handle potential medical expenses. He had also put off buying a term insurance policy till now, and if something were to happen to him, how would his family cope with their daily expenses?

If you've invested in health and life insurance, you've taken a crucial stride in safeguarding your family's financial future. However, insurance is not a static financial solution; it requires ongoing attention. As situations change, so do the requirements for coverage. When an individual's insurance coverage falls short, it's termed underinsurance. So how can you determine if your coverage is adequate?

Within this article, we will explore this concept of underinsurance, identify five signals indicating that you might be underinsured, and discuss various avenues for obtaining ample coverage.

What is Underinsurance?

As mentioned, underinsurance refers to a situation where individuals lack adequate life insurance and/or health insurance coverage to adequately safeguard their financial objectives or the financial prospects of their dependents during emergencies. While having insurance doesn't mean emergencies can be prevented, being sufficiently insured can assist you and your loved ones in avoiding financial distress in the face of the unexpected.

Given that being underinsured can result in significant financial burdens during emergencies, it's crucial to recognize the warning signs and take corrective measures before it's too late. Let's look at these signs:

#1: Your Family Relies Solely on Group Insurance Coverage

If you're a salaried individual, both you and your dependents could be covered under your employer's group health insurance benefits. However, the insurance provided by group insurance plans often comes with a limited coverage amount, typically ranging from Rs. 2 to 5 lakh. While this might suffice for a small family of two if both individuals are employed and have separate group health insurance from their respective employers, it might fall short if you have dependents such as children and parents.

To address this, consider acquiring a separate family floater plan to cover multiple dependents, such as your spouse and minor children, under a single policy.

Also, remember that a group insurance plan remains effective only while employed with the respective company. If you switch jobs or face job loss in the future, you and your dependents will lose the group coverage, and the continuity of such coverage with a new employer is uncertain.

#2: You have Investments in a ULIP but no Term Insurance

Unit-linked insurance plans (ULIPs) are great investment cum insurance plans with the dual benefits of life insurance and market-linked investments to the policyholder. While they are good additions to your financial portfolio, the life insurance coverage provided by ULIPs should be enhanced with a Term insurance plan.

Usually, a ULIPs' life coverage is around 10 times the annual premium paid. For instance, if your annual ULIP premium amounts to Rs. 1,20,000, your life insurance coverage will be Rs. 12 lakhs. This amount might not suffice to ensure your family's financial stability for significant expenses in your absence. While this doesn't necessarily imply that you should surrender your ULIP policy, it's advisable to contemplate purchasing a term insurance plan that offers substantially higher life coverage at a fraction of the cost. You can get term plans like Zindagi Protect by Edelweiss Tokio Life Insurance online for comprehensive life coverage. A portfolio with both ULIPs and Term Insurance coverage is financially robust.

While many Indians continue to invest in insurance-cum-investment plans, as per the Indian Economic Survey, 2023, the emergence of online term plans has slightly tilted the preference towards protection plans. These term plans usually cost less than their offline counterparts. Also, they pack the usual life insurance benefits of tax deductions up to ₹ 1.5 lakhs a year under Section 80C of the Income Tax Act. Furthermore, the payout from a term plan is not taxable, as per Section 10 (10D) of the Income Tax Act.

If you are someone who needs to enhance their life cover by adding a term plan to their portfolio, check out term insurance plans by Edelweiss Tokio Life Insurance.

#3 You have not revised your Term Insurance Coverage Over Time

Acquiring term insurance when you're young is always recommended, as this usually results in lower premiums. However, after securing a Term insurance plan, many fail to revisit or enhance the plan, even after significant life events like marriage or having children. When your responsibilities increase due to more dependents and greater financial obligations, it's crucial to elevate your term insurance coverage to adequately safeguard your family's financial future.

It is not just your family growth that should prompt a revision in life coverage, but also the addition of liabilities like home loans, personal loans, etc.

Therefore, if it has been five years or more since you originally obtained your term insurance policy, contemplate augmenting your current coverage or purchasing additional insurance. You can calculate the premiums for the revised policy by using an online term insurance calculator.

#4. Your coverage is Unchanged Despite Increased Expenses

This stems directly from the last point. A rise in income is always welcomed, and lifestyle changes are expected when you have more financial resources. Yet, we often overlook the fact that elevated expenses resulting from these lifestyle changes also impact our insurance needs.

For instance, let's consider a scenario where your annual household expenses were Rs. 4 lakhs four years ago, and you based your term coverage calculation on this figure. Let's assume you estimated a coverage amount for at least 30 years and accounted for liabilities and one-time expenses (such as children's weddings). This is how your initial calculation might look like this:

Annual Household Expenses = Rs. 4,00,000

Estimated Coverage Amount for 30 Years = Rs. 1,20,00,000

Liabilities and One-Time Expenses = Rs. 1,00,00,000

Total Coverage Required = Rs. 2,20,00,000

You determined a total of Rs. 2.2 crores, leading you to purchase term insurance with that coverage. Four years later, if your family's annual expenses have escalated to Rs. 8 lakhs, the amount required to cover basic household expenses for the next 26 years (30-4) would be Rs. 2.08 crores. This is an additional Rs. 88 lakhs compared to your initial calculation. Your revised calculation will look like:

Annual Household Expenses = Rs. 8,00,000

Years of Coverage Needed = 26

Additional Coverage Required = Rs. 2,08,00,000

Increase from Initial Calculation = Rs. 88,00,000

While your current life insurance coverage of Rs. 2.2 crores can still address this additional cost, your family might need more financial resources for future higher education or wedding expenses. This further underscores the importance of periodically evaluating your life insurance coverage when your household expenses have risen since the time you acquired your policy.

#5 You have Uninsured Dependents

Lastly, suppose you have dependents, such as elderly parents, who aren't covered by your existing health insurance plan. In that case, it's essential to consider incorporating them into your current plan or obtaining a separate health plan for them. Having uninsured dependents can result in substantial expenses, as all medical costs would need to be paid out of your pocket.

In Conclusion

Insufficient life insurance coverage can leave your loved ones financially vulnerable in case of your unfortunate demise. Similarly, inadequate health insurance coverage can carry significant financial implications, potentially forcing you to dip into savings such as retirement funds or accrue substantial debt to cover medical costs. Recognizing signs of underinsurance and promptly taking corrective measures is essential to securing your financial goals and ensuring the financial well-being of your family in times of crisis.