Insurance: How Much Is Enough?

There is no argument about insurance being essential. The question is how much of insurance does one need? As a consumer of this very essential service try finding an answer to this question at your end. We are quite certain it would not be an easy task for anyone to zero in on the correct and precise answer. We decided to find answers to this vital question for the benefit of consumers in general and our readers in particular. The three most important elements of the entire chain in life insurance - comprising the insurance companies, their agents, and finally the consumers - are what we have looked at. Read ahead to know what we found:

The Consumer Perspective

India is a country of more than a billion and a half people. It is the strong appeal of the consumption-driven growth story that has given India a very prominent place on the global economic landscape. We spoke to a cross-section of consumers to get a perspective on the various issues that are important in deciding how much of insurance does one need. For this purpose we started with trying to gauge the basic understanding of insurance that consumers have. In this vast consumer-driven market how much do investors really understand insurance? Deepa Lala (37), a senior level software executive, candidly admits that her understanding of insurance is not much except for the financials. 

For her, insurance is something that is helpful at the time of ‘loss of property’. According to Deepak Chodankar, another senior executive with a software development company, insurance is a back-up for uncertainty that can happen in one’s life. Both points taken together suggest that consumers do have a basic understanding of what insurance is meant for. Even though there are talks of the Indian consumer being under-insured you will find that a large number of consumers do take insurance in some form or the other. “I don’t believe in someone who can give an assurance for the loss of life or property. I have some insurance but the purpose behind taking it was to avail income tax benefits,” says the senior software executive we spoke to.

This is something that is very commonly seen among consumers. Sangeet Kolhatkar, a chartered accountant by education and working for a top business consulting company, says, “I did not take it for insuring my future or for providing my dependents after my death but just as an investment on which I could get income tax rebate.” The next logical and most important question that we asked consumers was the basis for arriving at the amount of insurance that they buy. We found that most of them go about it in a very ad-hoc manner. That brings us to the most important question: Do consumers believe that the amount of insurance that they have bought is in fact the correct amount for them? None of the people we spoke to on the subject thought so. 

In fact the question forced some of them to actually ponder on it for the first time in their life. “No, it is not the correct amount, but as I do not believe in insurance I did that just so that I should not feel I do not have a policy at all,” Kolhatkar says. We are not suggesting that our sample size or the kind of people we have spoken to is definitely the correct and a fool-proof sample for driving home the point. But it certainly reflects on the need to educate consumers on the very important subject of how much insurance they need. While most of us are at the mercy of agents of insurance companies, there are a whole lot of consumers who do not bother to question the basis on which insurance policies are sold to them. 

Insurance Agents – Role And Impact

This is the actual set of people who are responsible for the consumers’ plight. How many of us do really get an insight into what is insurance and what it is meant for from the guy who comes to sell us the policy? Have you ever come across an agent who will tell you that an insurance policy is basically meant to protect loss of income to your family and cover expenses and liabilities which are a part of your responsibilities in case of your death? We spoke to a couple insurance agents to get their perspective on this whole issue of deciding the correct amount of insurance that one needs to have. 

If you look at the marketing pitch that insurance agents use while selling policies it largely centres on multiple factors including risk cover, investment, planning for retirement, and critical illness. The stress on the investment and the returns angle is sometimes so overwhelming that consumers end up losing sight of the actual purpose which is risk of impairment of earning capacity due to various reasons which we believe should be the core of insuring oneself. The agent fraternity seems to be looking at factors like number of dependents, the time when money would be required for education or the marriage of children, amount that the insured would require on retirement, etc. 
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Will they ever tell us the basis of insuring our lives? If an individual is in a fairly good position to earn for a reasonable length of his life and a reasonable amount, will s/he not be in a position to save and deploy funds in the correct manner? Will this not enable you to build a corpus for all these needs? The question that needs to be answered here is what happens in case this capacity to earn gets impaired midway through your journey in life? Insure yourself for that big and unfortunate possibility. Are consumers even aware of which factor is the most important from the point of view of the agent who comes to sell you an insurance policy? It is the affordability of the consumers. According to the agents who sell insurance, it is the amount of premium that you can afford to pay - whether on a monthly, quarterly or annual basis – that will determine the quantum of insurance for you. 

Can someone please tell us as to who benefits from such an approach? The answer is quite obvious. Insurance agents will never stop short of selling multiple policies and different kinds of products to the same client. A fact that has been openly admitted by the agents we spoke to. Is one policy not enough for a client to take care of insurance in the true sense of what it means? While one vehemently denies it as not being enough, the other very candidly admits that if they were to sell pure insurance only to cover life in the true sense then yes it would be more than enough. We think it is high time that consumers woke up to these facts and started questioning the agents selling them insurance about these realities. Of course this would need a lot of effort on the part of the regulators, policy makers, and service providers to educate the consumer on various aspects. So, what are insurance companies doing on this front?

Insurance Companies - The Beneficiaries?

It is fairly easy to blame it on your agent but it is necessary to keep in mind that it is after all the insurance company which is behind the whole show. So, what are insurance companies primarily here for? We think that the primary reason for the existence of the insurance companies is to protect against uncertainties - a sentiment echoed by the industry too. But it doesn’t stop at that. It is also believed to be essential in helping build a corpus for future financial needs. We have a very simple premise. Insure for your family’s lifestyle and expenses in case you were to be no more in a position to earn for them. 

The Conclusion – Keep Life Simple

We strongly believe that none of us know for sure the exact amount that we need to insure our life for. If there were an exact value to the life of an individual, wouldn’t life be much simpler? Any which ways we are of the opinion that you do need to have your life insured, but only to a certain extent. There is no exact measure of one’s life to get to an optimal amount of insurance that one needs. There is a drastic need to ensure that consumers are educated on various aspects of insurance. It is on all the stakeholders, including the consumers themselves, to make sure that the platform on which insurance is being sold by the companies becomes one that is really beneficial for them in the true sense of the term. 

There is no point in buying insurance just for the sake of it. In fact a reckless buying of insurance policies may unnecessarily result in an unbearable burden in adverse times such as recessionary periods when employment itself becomes an issue. Inadequate insurance covers will only mean sinking money into something that will actually be of no use when it really matters. And you may well remember that if you fail on your premium payments, policies lapse within no time. Moreover, try to keep your insurance and investments as two separate responsibilities rather than trying to merge the two. And before we end, here is what can help you in determining an approximately correct amount of insurance for yourself to some extent.

Factors to be considered in arriving at the amount of insurance you need:

• Your age
• The number of people dependent on you
• Annual income
• Estimate of annual expenses
• Outstanding loans and liabilities
• Current investments
• Future requirements of funds

There would be other factors that need to be built into what is stated above while ascertaining the correct amount of insurance that a person would need. These include the prevailing and expected rate of interest, the prevailing and expected rate of inflation, etc. All these call for a fairly complex algorithmic calculation which at times can get pretty confusing for a layman. Some companies have tried to keep it very simple by providing a user interface on their website and including the most relevant inputs for the purpose of calculating the requirement of insurance for a customer.

As for a rule of thumb approach to calculating the amount of insurance you would probably need to take on your life, we suggest one should ideally look at covering income for at least the next five years going forward and building into it some mark-up for taking care of inflationary pressures.