Why Most Indians Remain Underinsured Despite Owning Multiple Insurance Policies

A large number of Indians believe they are financially protected simply because they own life insurance policies. In reality, experts warn that most households remain dangerously underinsured, with coverage falling far short of what families would actually need in the event of a tragedy.

Several insurer-backed studies show that a majority of Indian policyholders have life cover worth less than five times their annual income. Financial planners, however, recommend life insurance coverage of at least 10 to 15 times annual income, and in many cases, even more. This gap between perception and reality continues to leave families financially vulnerable.

The root of the problem lies in how insurance is traditionally sold and understood in India. Insurance is often marketed and purchased as a savings instrument or a tax-saving tool rather than a means of income protection. Popular products such as money-back and endowment plans reinforce this mindset by offering guaranteed returns, periodic payouts, and maturity benefits, creating the illusion of financial security.

In practice, these plans provide very limited life cover. A significant portion of the premium paid goes toward savings and guaranteed returns instead of protection. As a result, individuals may pay substantial premiums for years while remaining insured for only a few lakh rupees—an amount insufficient to replace income, repay loans, or support dependents in the long term.

This mismatch becomes painfully evident when a claim arises. Families often realise too late that the payout cannot sustain their lifestyle, cover household expenses, fund children’s education, or manage outstanding liabilities. What exists on paper as “insurance” fails to deliver real financial stability.

Another factor worsening underinsurance is the psychological comfort these traditional plans offer. Because payouts and bonuses are visible, policyholders assume they are well covered, even though the actual sum assured is far below their financial needs. This false sense of security discourages people from evaluating their protection gap.

Experts suggest that assessing underinsurance starts with a simple calculation. Annual income should be multiplied by 15 to 20 to estimate the required life cover. Existing policies should then be evaluated based on the actual sum assured payable on death—not maturity value or total premiums paid. For many, this exercise reveals a stark shortfall.

Term insurance is widely regarded as the most effective solution to this problem. Unlike traditional policies, term plans focus purely on protection, offering high coverage at relatively low premiums. Since there is no savings component, the entire premium goes toward life cover, making it far more cost-effective.

Despite its advantages, term insurance adoption in India remains limited. Many view it as an “expense” because there is no payout if the policyholder survives the term. This mindset overlooks the fundamental purpose of insurance: safeguarding dependents against financial loss.

Financial experts advise separating insurance and investment goals. Life insurance should be used strictly for income protection, while wealth creation should be handled through separate investment products. Mixing the two often results in inadequate protection and suboptimal returns.

For individuals who already own endowment or money-back policies, the recommended approach is not to cancel them abruptly. Instead, term insurance can be added to bridge the protection gap while existing policies continue as savings instruments.

Underinsurance rarely announces itself until it is too late. It hides behind policy documents, premium receipts, and tax deductions, giving families a misplaced sense of safety. Until insurance is viewed primarily as protection rather than savings, this silent risk will continue to expose Indian households to severe financial distress.