Deepak Yohannan
MyInsuranceClub.com
The problem with underinsurance is that it is sneaky. An uninsured individual knows that he lacks the security of insurance. An underinsured individual finds out about his lack of insurance coverage only after he files a claim.
For example, Mr. Mukherjee believes that the health insurance cover provided by his workplace is more than adequate. Then, one day, he falls seriously ill. His family rushes him to hospital only to learn that the employer-provided medical insurance comes with a high deductible, limited annual benefits and exemptions on specific treatments.
Thus, an underinsured person has insurance, but not enough.
Although the dangers of underinsurance are most evident in the case of health insurance, it shows up in the life insurance, business insurance and even the car insurance sectors. A large majority of Indians still lives on the assumption, “This will not happen to me.”
Car insurance presents a particularly succinct example. The law bars the driving of uninsured cars on Indian roads. Basic third-party insurance will make your car road-ready, but it will not prepare you for the dented door or the cracked windshield. You may not want to pay the high premiums, but accidents do happen. Even if a collision is not your fault, there is no guarantee that the other party will have third-party coverage. While you can learn to budget for the annual premiums, you will always feel the pinch of unexpected repair costs when you are underinsured.
In the arena of health insurance, a policyholder is deemed underinsured if his medical expenses account for 10 percent or more of his annual income. It becomes a little more complicated when it comes to life insurance.
A general rule for buying life insurance is ensuring the coverage is at least 10 times your annual income. However, the phenomenon of underinsurance in the life insurance sector does not stem from high premiums; it arises from the motivations that push the policy buyer. In India, people buy insurance for its tax-saving benefits. As a result, the premiums are not determined by the actual coverage needed, but by the extent of tax that must be saved.
There is also the appeal of ULIPs, Endowment plans and cash-back policies. Many Indians choose these policies over traditional term life plan simply because they dislike the idea of getting no maturity benefits if the term expires. Yet, this eagerness to collect maturity benefits may lead the policy buyer to pick a plan that offers only a minimal death benefit. Then the losers are the dependents of the deceased policyholder.
Underinsurance largely stems from lack of understanding. People do not realize that insurance mainly provides risk security. There are other avenues for making your money grow—insurance is not among them. You can be a cost-cutter in all areas of your life, but you should not look to reduce insurance premiums at the cost of coverage. The dangers of underinsurance are just too high.
If your business and personal assets are not adequately covered or if you have high deductibles and exemptions on your health insurance, footing out-of-pocket expenses can become a huge hurdle. If you have inadequate life insurance, you family would suffer the financial consequences when you are no more. Remember, being underinsured is as bad as being uninsured is—this is a lesson that we all must learn.
The author is the CEO of MyInsuranceClub.com 
