Why Rising Incomes Are Not Translating Into Adequate Insurance Cover

A family may have bought its first life insurance policy when the children were young, the home loan was manageable, and monthly expenses were considerably lower. Ten years later, the income may have doubled, the family may have moved into a bigger house, and its financial responsibilities may have increased. But has the insurance cover kept up?

For many Indian households, the answer may be no.

As incomes rise, families tend to spend more on homes, education, holidays and other lifestyle needs. They also put more money into mutual funds, shares and other investments. Insurance, however, often gets left out of this financial upgrade. Policies bought years ago continue to run, even when the circumstances for which they were purchased have changed considerably.

“One reason is the way families approach financial planning. Investments and tax savings usually get more attention because their returns are visible. Insurance, on the other hand, is often seen as an expense that needs to be incurred rather than an essential part of managing household finances,” says Ram Patrudu, Co-Founder, Trovity InsureTech.

When Old Policies No Longer Serve The Purpose

Consider a person who bought a life insurance policy at the beginning of their career. At the time, the cover may have seemed reasonable. But after marriage, the birth of children and the purchase of a house, the financial picture changes. There are now more people depending on that income, along with a substantial home loan to repay.

The original policy may no longer be enough to support the family if the earning member is no longer around.

This is where many households need to take a fresh look at their insurance. A rise in salary does not automatically call for a larger policy, but a rise in financial responsibilities should prompt a review of the existing cover.

“Health insurance deserves similar attention. Many salaried employees depend largely on the medical cover provided by their employers. While this is useful, it may not be sufficient for the entire family. The cover may have limits, exclusions or conditions that policyholders are not fully aware of. There is also the question of what happens when someone changes jobs or retires,” says Patrudu.

Relying entirely on workplace insurance can leave families exposed at a time when getting an individual policy may be more difficult or expensive.

More Policies Do Not Necessarily Mean Better Protection

Another common mistake is to judge insurance adequacy by the number of policies held. A family may have bought several life and health policies over the years, but that does not mean its needs are fully covered.

What matters is what these policies actually provide. For life insurance, the assessment should take into account outstanding loans, regular household expenses, children's education and the number of years dependants may need financial support. Existing savings and investments also need to be considered.

For health insurance, the family should look beyond the headline sum insured. Waiting periods, exclusions, room rent restrictions, sub-limits and other policy conditions can affect the amount it eventually receives when making a claim.

In some cases, families may discover that they have overlapping policies. In others, they may find that the cover is simply not enough.

A Review Is Better Than Buying In A Hurry

Insurance requirements change with age and family circumstances. Marriage, parenthood, a home purchase, a change in income or responsibility for ageing parents are all reasons to revisit existing policies.

“This does not mean buying more insurance every time there is a salary increase. The first step should be to understand what is already in place, identify any gaps and decide whether changes are necessary. The cost of additional cover also needs to fit within the household budget,” suggests Patrudu.

Ultimately, the purpose of insurance is not to accumulate policies or chase a large sum insured. It is to ensure that a medical emergency or the loss of an earning member does not leave the family struggling to meet expenses or abandon important financial goals.

Indian families are becoming more comfortable with investing and building assets. The next step is to give equal attention to whether those assets, incomes and financial commitments are adequately protected.