Can you have too much Life Insurance?

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If you've been keeping up with our weekly edition of 'Your Money', you are no stranger to the fact that life insurance is of paramount importance. It helps you secure your future and provide a financial safety net for your family.

But that's not all. Depending on the kind of plan you choose, you can get any of the following added benefits over and above an insurance cover –

  • A savings component
  • Market-linked investments
  • Retirement benefits
  • Additional benefits via riders

Despite these many benefits, most of India is grossly underinsured.[1] That said, there may be individuals who have more insurance coverage than they need. Wonder why this could happen? Let's check out the possible reasons you may have more insurance coverage than your requirement.

Reasons you might have too much life insurance coverage

Although it is not very common, there are many reasons why you may be over insured. Here is a preview of some common scenarios why you may have more life insurance coverage than you need.

1. You may have paid off your liabilities

You may have originally purchased your life insurance plan after factoring in your debts and liabilities. But later, you may have paid off these debts sooner than expected, leaving you with a higher coverage than required.

2. You may have an alternate source of funds for your life goals

Initially, you may have purchased your life insurance policy after factoring in certain life goals, like your child's education and your retirement. But later, your parents may have offered to pay for your child's college, or you may have received an unexpected inheritance.

3. You may have been a victim of overselling

In some cases, you may have been sold more insurance than you need by an insurance salesperson. Although the IRDAI has now stepped in and introduced measures to curb such practices, they were common in earlier years.

The right amount of coverage vs. the right kind of coverage

Being over insured means that you have more life insurance than your needs. In other words, it means the amount of coverage you have is higher than necessary. But the amount is not the only thing you need to keep an eye on.

There is also another aspect of your life insurance cover that you need to look at. And that is the kind of coverage you have vs. the kind of coverage you need. Let's discuss some scenarios to understand how you may not be paying for the right kind of coverage.

Scenario 1:

Say you are in your 40s now, and you have term life insurance coverage that is valid till you are 50 years of age. However, you do not plan to retire any time soon, and you have a loan that has a tenure of another 20 years. In this case, whole life insurance coverage may be more ideal for you than term life insurance coverage.

Scenario 2:

Now, say you have no children. Your family consists of just you and your spouse, and both of you are earning members. You already have a corpus of Rs. 1 crore built up. But for whatever reason, say you had purchased a Unit Linked Insurance Plan (ULIP) earlier. This may be too much coverage for you. Instead, a term life insurance plan may be sufficient for you.

Scenario 3:

You are approaching your retirement age, and you have no other kind of life insurance coverage except a term insurance plan. But you need to set up an alternate source of income because your primary income will no longer be available. In this case, you may find that an annuity plan is a good fit for your needs.

So, how do you figure out the right amount and kind of coverage you need?

You may be paying for the wrong amount or the wrong kind of coverage. This eventually locks up funds that could have been otherwise redirected to more essential and appropriate insurance or investment products.

So, before you buy a life insurance plan, you need to figure out if the policy offers the right kind and the right amount of coverage for your needs. Here are three key things to consider in this regard.

The sum assured

Your life insurance cover should be a financial safety net for your family. So, it should be enough to replace your income, cover your liabilities and pay for your children's education and wedding in your absence.

A good rule of thumb is to have a policy with a sum assured that is around 5 to 10 times your annual income. But it's best to factor in your specific needs and goals to check if this sum is adequate for you.

The tenure of coverage

Your life insurance coverage should have a tenure that is long enough to cover your longest debt or your longest life goal. For instance, if you have a loan with a repayment tenure of 25 years, your coverage should be enough to last that period. Alternatively, if your child is now 10 years of age, your coverage should last for at least another 15 years to be able to cover the life goal of your child's education or wedding.

The kind of life insurance

Lastly, you need to factor in the kind of life insurance you need, so you don't end up paying for the wrong kind of plan. If you are looking to create wealth through insurance, a ULIP may be ideal. On the other hand, if you don't have any debts and if you already have a retirement fund and other investments in place, term insurance coverage may be sufficient.

If you are looking for an easy way to figure out the right level of coverage for yourself and your family, you need to factor in these aspects. Alternatively, you can simply make use of a life insurance calculator to check your Human Life Value (HLV), and buy insurance accordingly.

Conclusion

So, as it turns out, it is possible to have too much coverage or too many insurance plans. In case you find that you are paying for more insurance benefits than you need, you can check the surrender value on your plans and see if the surrender option is financially beneficial. Or, you can contact your insurer to see if it is possible to reduce your coverage and adjust the premiums accordingly.

[1] https://www.business-standard.com/article/current-affairs/with-75-grossly-underinsured-why-aren-t-indians-sufficiently-covered-119011500150_1.html
ADV/4/22-23/112

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