Dinesh, 35, works in an IT company. He lives a sedentary lifestyle, meaning he is usually required to be seated at one place for hours without any movement. This means he is less active than an average person. One day, Dinesh suffered a heart attack and had to be admitted in the hospital immediately. Unfortunately, Dinesh passed away during treatment. Having spent a majority of his savings on the cost of treatment, his family filed a claim. After the claim was approved, the compensation amount that they received was lower than expected. This is known as being underinsured. What life insurance is, what is being underinsured in terms of life insurance? And how can it be dangerous? Read more to find out.

What is life insurance?

A life insurance policy is a type of policy in which the policyholder and the insurer get into an agreement. As per the agreement, the insurer financially compensates the beneficiaries of the insured in the event of the insured’s sudden demise. The monetary compensation that the beneficiaries receive help them with managing the day-to-day expenses and enjoy a financially secure future.

What does being underinsured mean?

In this policy, the insurer agrees to financially compensate the beneficiary of the insured. This compensation is known as life cover. Depending on the policy purchased, the life cover could be higher or lower. Usually, it is advised to opt for a policy with a high cover amount. However, policies with a higher cover amount cost more. So, people opt for a policy with lower cover amount to save money. Opting for a policy with lower cover amount is known as being underinsured. While it might seem safe for many to go for a cheap policy, it can have disadvantages in the future.

What are the causes of being underinsured?

Listed below are the reasons why many people are underinsured:

  1. Opting for a cheap policy

As mentioned above, people opt for a policy with a lower life cover amount. This is usually the case in terms of people who cannot afford policies offering higher cover. Another reason why cheap policies are popular is because of the tax exemptions that can be availed on premium payments under Section 80C of the Income Tax Act. Policies with a higher cover means paying more premium which could exceed the exemption limit. So, in such cases opting for a cheaper policy is the easier option for many.

  • Being misled

People tend to buy their insurance policies from an agent rather than buying online. When you purchase a policy from an agent, you end up paying for the commission as well. In order to earn a good commission, agents tend to sell policies that might look good on the paper, however, do not have a good benefit value for the insured. This means you could end up paying more for a policy that compensates for less. Many people become victims at the hands of such agents.

  • Not buying the right policy

Due to a lack of information, people are not always aware of which policy might suit their needs. In such cases, people end up buying the wrong policy or policy that has a lower cover amount. The realisation of being underinsured only occurs when the claim has to be filed for compensation.

How dangerous is being underinsured?

Being underinsured can have major consequences such as:

  1. If the policyholder is the sole earning member of the family, surviving on savings will not be enough. As the cost-of-living increases, the savings could get depleted rather quickly. The cover amount can help in adjusting to these changes. However, a lower cover amount will not be helpful in the long run as the amount will be insufficient after a point.
  2. If there are any outstanding loans or debts that are yet to be repaid, the demise of the policyholder means that responsibility falls on the shoulder of the beneficiary. A higher cover amount will entail that the repayment can be managed easily without the risk of financial instability. However, a lower cover amount might entail that the repayment can be managed only up to a limit before more money is required.
  3. The cover amount can help in securing the future of the child in terms of education and marriage. However, a lower cover amount means having to borrow money externally to cope with those expenses.

So, always be aware about what kind of life Insurance policy is suitable for you before purchasing it. Also, always approach a reputed agent for your policy needs. These steps can help you avoid being underinsured.