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India has a very poor life insurance coverage ratio. Here’s why

Jan 04, 2019 | 2 years ago | Read Time: 4 minutes | By iKnowledge Team

 Life insurance coverage ratio means the amount of insurance coverage as compared to the income of the policyholder. In India, traditionally, people have been buying endowment policies and ULIPs where the coverage may not be adequate.

Why would one invest in life insurance? Essentially, it is a way of providing for your family after you’ve passed on. Life insurance proceeds ensure the family gets income to cover their expenses. Naturally, everyone who takes an insurance policy would want to make sure they covered their family as thoroughly as they could. But, is that really what is happening?

One of the problems that India faces is a very poor life insurance coverage ratio. Coverage ratio means how adequate the insurance is. It helps to determine whether the death benefits and investments are enough to support the family’s daily and health expenses.

Life Insurance Coverage Ratio = (Net Worth + Death Benefits)/Annual salary or Annual income

Let us take an example of Manoj. His net worth is Rs. 30 lakhs (PPF, EPF, other mutual fund investments). He currently has an endowment plan that will pay him Rs. 30 lakh as death benefit. His annual salary is Rs. 8 lakhs.

Life Insurance Coverage Ratio = (30+30)/8 = 7.5

This means the current life insurance proceeds and investments will be enough to cover the family’s expenses for only 7.5 years. This calculation does not consider the impact of inflation.

Another method to calculate life insurance coverage ratio is to use the expenses per month as a way of knowing how many months of expenses are covered. Ideally, the minimum ratio for life insurance coverage is 10. This means that the life insurance benefits along with the investments should at least cover 10 years of expenses for the family.

Why does India have a poor life insurance coverage ratio?

The problem with investor Indians is that for several years, insurance was also looked at as an investment. This was because of:

  • Agent mis-selling of ULIP policies, especially before 2008
  • A strong preference for investments. Seeing term insurance policies as an ‘expense’ while seeing ULIPs as an investment made them strongly prefer ULIPs, which have relatively lower coverage ratios, but also play an important role in the overall financial portfolio

(A) Many Indians invested in some form of ULIP or endowment plan which were aggressively sold by companies. In 2010, ULIPs accounted for 50% of the policies issued.

Image source: Prabhudas Liladhar Report

IRDA’s new guidelines capped ULIP charges, increased the lock-in period from 3 years to 5 years, and added rules regulating the premium that would go into investment. Prior to these guidelines, selling ULIPs was very profitable for insurance companies. The IRDA also capped the commission to agents from selling ULIPs. The commission was linked to the premium paying term.

Image source: Prabhudas Liladhar Report

This led to a drastic fall in the number of ULIP policies sold. Another regulation was to drastically reduce and remove surrender charges on ULIPs. Another policy change was to have the minimum sum assured at 10 times the annual income of the policyholder. This would ensure a better insurance coverage ratio for the policyholder.[1]

Image source: Prabhudas Liladhar Report

By investing in a faulty ULIP plan, the policyholder did not benefit and was not covered at all. The agents tempted investors with the prospect of them managing their funds and getting an insurance cover. Many agents tempted policyholders with impossible returns after investment in a ULIP.

(B) With many insurance companies pushing endowment products and ULIPs which promise a maturity benefit, Indians opted for policies with low sum assured that barely covered their needs.

Tempted with the idea of getting a sum on maturity that seemed more than the amount of premium they paid, Indians invested in low ticket endowment plans. Several plans invested some part of the premium in low return investments. Indians also typically do not check their insurance coverage and assess it with their changing lifestyles. Once a policy is invested in, they don’t increase the coverage or switch to better performing policies.

These two behaviours have a major role in pulling down India’s life insurance coverage ratio. But with the increase in financial literacy, people are opting for term insurance. Term insurance is pure life insurance.

But what is term insurance? A term plan charges premium to purely cover the risk of insuring the life of the policyholder. A term plan offers one of the most affordable ways for individuals to protect their loved ones.  It is possible to get a term plan for Rs. 1 crore for less than Rs 7,000 in annual premium.[2]

Aegon Life’s iTerm Insurance plan provides comprehensive protection at an affordable rate. This term plan has an inbuilt accidental death rider with options to add on other riders for critical illness, terminal illness, disability. This term plan offers different type of payouts such as lumpsum, monthly income, combination of the two, depending on what suits the family. With the added term riders, especially the waiver of premium and the critical illness, the rider sum assured will be paid out on diagnosis which will help with medical costs.

If you’re looking for insurance, consider the needs of your family when you invest. Pick a term plan wisely so that you can cover majority of your family’s needs for a long time.

II/Dec 2018/4738


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