Underinsurance checker

If you have loved ones you want to financially protect in your absence, then including term insurance in your financial plan is non-negotiable. Your term policy acts like a Plan B, Plan A being your savings, that helps you secure your family's financial future, especially if you are the sole breadwinner. 

So if you have purchased term insurance, then kudos to you! You have already taken the first big step towards ensuring financial security for your family. 

You need to buy term insurance but your responsibilities do not end there. Are you confident that your current term plan life cover amount is enough to protect your family financially when you are no more? Simply put, you need to check if you’re underinsured or not at regular intervals. 

What is underinsurance?

Underinsurance occurs when your life cover is less than what your loved ones will need to stay financially secure, in the event of your untimely death. 

What are the probable causes of underinsurance? 

• Not knowing what the adequate life cover amount is for one’s needs 

• Prioritising other characteristics of the term policy, such as tax benefits, premium amount, etc., instead of buying a life cover basis your needs

• Not re-evaluating life insurance needs according to changing life milestones, lifestyle upgrades, and financial responsibilities on a regular basis. For example, if you bought the policy when you were single, a lower cover may have worked then. The same cover may not work if you get married and have to take care of your spouse as well. 

While the philosophy of “being happy with what you have” may work with other things in life, this shouldn’t be the guiding philosophy when it comes to your life cover. You don’t want to risk your loved ones’ future by leaving them with an insufficient payout, right? The real question is how much life cover should i have?

Here’s an example to demonstrate how underinsurance can result in financial struggles for your family. 

Ratan earns ₹ 6 lakhs a year. He is 30 years old and wants to retire at the age of 60 years. He believes that his family would become financially independent when he turns 60.  

He bought a term plan for a 30-year period with a life cover of ₹ 60 lakhs. 

As time went on, he got a home loan. His child started school. His financial responsibilities increased. Unfortunately, a few years into the policy period, Ratan passed away at the age of 40 years due to an accident, and his family received the ₹ 60 lakhs payout. 

His family later realised that the policy money was just enough to cover costs such as household expenses, home loan EMIs, kids’ school fees, etc. only for the next 10 years. It may not be enough to cover bigger expenses such as healthcare costs. 

If Ratan had taken adequate life cover that could help them meet their expenses until he would’ve turned 60, his family may have been financially independent by then, as per his calculations.  

But now, they’ll need to lower their standards of living and make compromises to make ends meet while grappling to meet their financial goals. They may not be able to repay the loans entirely, or afford education and other expenses; forget about the indulgences that make life worth living. 

You don’t want your family to be in this situation, right? This is why you need to buy a term plan with adequate cover to ensure complete financial protection for your family and peace of mind for yourself. 

How to avoid underinsurance?

Here’s a small test to help you understand if you’re underinsured or not. 

Step 1: Take your annual income. It is the pre-tax annual income that you earn by actively working, i.e., the income that’ll stop coming in if you’re not around. It includes your salary and business income but not any rental income, interest, and dividend. 

Step 2: Multiply your annual income with the number of years you still plan to work for. This is the life cover that should be adequate to secure your family financially. 

Step 3: Subtract your current life cover from the adequate life cover amount. If the answer is positive, you’re underinsured by that amount.  

As per our example, Ratan should’ve gotten  ₹ 6 lakhs x 30 years =  ₹ 1.8 crores of life cover. His existing cover was  ₹ 60 lakhs. So he was underinsured by  ₹ 1.8 crores -  ₹ 60 lakhs =  ₹ 1.2 crores.

If you want to skip this math and want a tool that can do this for you, try the KlarifyLife Underinsurance Checker. This tool will let you know if you’re underinsured or not within a minute; additionally, it will help you spot the gap in your life cover as well. 

Now, what you, as an existing policyholder who is underinsured, could do to increase your life cover is: 

• Speak to your insurer/financial advisor to check if you can increase your life cover 

• If you can’t change your current plan’s life cover, get an additional plan to increase your life cover. For example, if your life cover need is  ₹ 1 crore but your current plan only offers  ₹ 60 lakhs life cover, you can buy another term policy with  ₹ 40 lakhs life cover. 

Remember to evaluate your life insurance needs and your life cover regularly especially if you have reached major life milestones such as a substantial salary hike, homeownership, marriage, childbirth, etc. In an uncertain world, only one thing is certain: that life can throw any curveball at you at any time. So go the extra mile to ensure that you are adequately covered at every step in your life and never settle for less when it comes to protecting your loved ones.