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Life insurance penetration in India is very low, primarily because of the low level of financial literacy in the country. But, it is surprising that even high income earners are not adequately insured.
A study of 3,000 individuals by Bigdecisions.in, a financial services portal, shows that even high income earners may be going about in life with barely 10-20% of the insurance they actually need.
Life insurance is meant to provide financial support to your family and dependants if something untoward happens to you. So, the life insurance cover should be big enough to generate an income for the family of the insured person. This would take care of the living expenses of the family. But, the cover should also settle all outstanding loans as well as provide for big-ticket one time expenses, such as a child's higher education and wedding.
High-income earners at maximum risk One may think that high income earners have lower need for insurance. On the contrary, they require higher cover because most people have huge home loans and other big-ticket borrowings. With higher expense levels the higher income group is at a higher risk
The study by the online portal shows that despite the popularity of online term plans offering huge cover at low rates, individuals in the high income bracket of `35 lakh-40 lakh per annum are inadequately covered. We also noted that the insurance cover did not increase in the same proportion as the increase in income.
Adequate life cover won't cost the earth if you buy the right type of policy. Traditional plans offer a smaller cover because they are essentially investment vehicles. At the age of 3035 years, a person will be required to pay a premium of almost `8 lakh-10 lakh a year for a cover of `1 crore.
Only the super rich will be able to afford such a plan. For the average buyer, a better option is a pure protection term plan which can offer the same cover for `8,000-15,000 a year, depending on the age and social habits of the buyer.
One should not be lulled into thinking that the life insurance cover he has is enough. A sum of `1 crore might sound big, but even an inflation-adjusted monthly withdrawal of `50,000 will deplete the entire corpus in less than 20 years. This is when we have assumed annual returns of 9% from the corpus and an inflation of 8%.
Should we blame it on low commission for agents? Why are people not tak ing adequate insurance?
It's not difficult to see where the problem lies.
Traditional life insurance policies, which offer very low cover, but charge a high premium, are the focus of insurance agents because they fetch higher commissions. An agent will pocket `30,000-35,000 if he sells a traditional policy with an insurance cover of `10 lakh. A term insurance policy with a cover of `50 lakh, on the other hand, barely earns him `1,0001,500. The study finds that protection is a lower focus area and a larger portion of the premiums are going into savings-cum-insurance plans.
The good news is that insurance companies are not only offering big covers, but are actively encouraging buyers to take larger covers. Some even offer a discount if the buyer takes a high-value cover. Apart from that, when an online buyer keys in his income details, he is prompted by the website to go for a cover commensurate with his income.
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