Getting insured is one thing, adequate life-insurance cover is another

Bear Bryant famously said: “Offence sells tickets, defence wins championships.” A solid financial plan with the right mix of investment tools builds the defence that you need to secure your financial future. 

With increasing financial literacy, rising income levels and greater awareness, along with greater technological adoption and policy reforms, more families in India are recognizing the need for long-term financial planning, including the importance of incorporating life insurance early on as a versatile tool for protection.

As term life insurance serves as a safety net for loved ones faced with unforeseen circumstances arising from a tragic demise, everyone should have a policy. It doesn’t matter whether you are in your early 20s, late 30s, a single mother or a father with dependents.

The concept’s value explains why life insurance is among the top three most preferred savings instruments in the overall household financial savings mix. It has grown at a compounded annual rate of 11% from 2018-19 to 2022-23, contributing 18% to total financial savings. 

Its penetration inspires optimism. Nearly 60-70% of families in India have some or another kind of life insurance cover (credit protection, individual life insurance products, PM Jeevan Jyoti Bima Yojana, etc). It’s a positive sign.

However, the key question is whether the cover that people in India currently have is enough.

Despite India being one of the world’s fastest growing economies, World Bank data suggests that the total sum assured as a proportion of GDP in India is barely 70%, as compared to 251% in the US, 143% in Thailand and 153% in Malaysia. 

This indicates a significant gap in the amount of insurance coverage. When an insurance policy is purchased, the buyer doesn’t always factor in the adequacy of the life cover should the need of its use arise.

Insufficient coverage could mean that families receive inadequate financial assistance, addressing only a fraction of their needs and rendering the purpose of term plans ineffective. Without adequate life cover, families may be forced to liquidate assets or redeem investments to pay for key financial requirements, which could derail their life goals.

It is also a good sign that Indians are increasingly recognizing the need to stay sufficiently protected by insurance policies. But what is an optimal level of life-insurance cover? This can be determined through a comprehensive assessment of current income, savings, liabilities and the family situation. The general rule-of-thumb is to secure cover that is 10 times one’s annual income. This will keep the policyholder’s family financially well supported in the event of his/her death.

In recent times, the sector’s regulator, the Insurance Regulatory and Development Authority of India (IRDAI), has embarked on a programme of reforms to facilitate ‘Insurance for All by 2047.’ Its efforts include improving the business and regulatory environment as well as instituting a risk-based capital regime and implementing International Financial Reporting Standards (IFRS) and the Risk-Based Supervision Framework—all towards deepening India’s insurance penetration within the next few years. 

While IRDAI’s overarching goal is to enable the sector’s growth and make insurance accessible to as many Indians as possible, the sector is also seeing constant expansion of the digital ecosystem that is helping insurers pursue their objectives better.

Together, the insurance industry and its regulator are taking numerous measures. These include the introduction of simple and innovative products, revamping of distribution channels and the adoption of new technologies to enable faster and more transparent processes. Not only must we increase accessibility to life insurance, as stated earlier, we also need to promote coverage adequacy. We should encourage households to review their portfolios.

Remember, like any other financial instrument, a policy purchase needs to be a very well-informed decision. It must take into account one’s income, debts and future family expenses. And once a term plan is bought, one should periodically review the coverage, much as we evaluate other expenses and taxes. Foreseeable life events—which can range from a marriage and birth of a child to buying a dream home—can significantly alter one’s insurance needs.

Regular evaluations can ensure that one’s policy stays aligned with likely requirements. Revisiting your coverage doesn’t just safeguard policyholders against under-insurance, it also helps rationalize premiums to be paid so that they are not needlessly high.

Just as a robust defence game-plan in football ensures a winning season, the right defence plan in your financial portfolio can see your family through and keep their life goals within reach.