Is your Life Insurance cover good enough for you?

Manish Shah
Bigdecisions.in

As comparative statistics go, India is not poorly penetrated with respect to Life Insurance. So, when one looks at life insurance penetration (premiums as a % of GDP) which at 3.4 % in 2011* compares rather favourably (compared to a lot of other per capita statistics) with 4.3% in Singapore, 3.3% in Malaysia, and 7% in South Korea**, it tells only half the story. When you look at the level of protection which is sum assured / GDP or how much life insurance cover exists relative to GDP, a different picture emerges with the gap between India and these markets being a lot higher. So, what this means is that the life insurance premiums paid compares reasonably favourably with the rest of Asia but most people that are covered are grossly underinsured. This is largely because we, in India often want our life insurance to double up as a savings instrument as well.

Our inexplicable belief that paying term insurance premiums is a waste of money is quite amazing. We rarely ask for a refund or return on car insurance if there’s been no accident or a return of health insurance premiums if no one was hospitalized – why then, do we always seek a return on life insurance premiums invested ? Term insurance premiums are lower than similar premiums of savings cum insurance policies for the obvious reasons that in one case, the insurance company pays you only when you die whereas if it’s a savings product then the company must pay you either ways.

So, the question is not so much whether you have life insurance (having it alone doesn’t mean anything) but whether what you have is enough.

Sandeep Das (age 40) is a typical example of having Life insurance, but too little of it. His details are:

Combined salary (him and his wife): Rs. 1,00,000 per month
Expenses excluding EMIs: Rs. 45,000
EMIs (home and car loans): Rs. 40,000
Savings: Rs.15000

Assets (including their home worth Rs. 50 lakhs): Rs. 75 lakhs
Loans outstanding: Rs. 42 lakhs (37 lakhs home loan and 5 lakhs auto loan)
Life Insurance: Savings plan with a sum assured (amount dependants will get when Sandeep dies) of Rs.10 lakhs

Now, if Sandeep unexpectedly passed away, the family’s greatest asset (the house) will probably need to be sold to pay off the loan or will put inordinate strain on his wife’s finances if the EMI is still to be paid. Unfortunately, since his life insurance policy will pay only 10 lakhs, the remaining 25 lakhs will need to be paid off by selling assets or high EMIs will need to be serviced by his wife. This is not counting the car loan.

For less than Rs. 10000 per annum or under Rs. 1000 a month, Sandeep can ensure that neither of his loans will put a financial burden on his family in case of his untimely death by buying a Rs. 50 lakh term plan. Why Sandeep has not thought of covering his family adequately, remains hard to understand!

Get a better sense of how much the ‘appropriate’ amount of insurance for you is, and what you can expect it to cost you.

*Source – IRDA Annual report 2011-12
**Source – Ernst & Young 2013 Asia Pacific Insurance Outlook