Underinsured Meaning, Risks, and How to Avoid It

Many Indians confidently say, “Yes, I have life insurance.” But scratch the surface, and the cover turns out to be far too small to actually protect their families. This is why the idea of being underinsured is troubling - you’re not uninsured, but you don’t have enough coverage to meet your family’s financial needs if something happens to you. The worrying fact is that in Asia, the insurance gap [1] has increased 35 percent since 2017. This means that if the primary breadwinner of a family dies, they will find it hard to meet their financial needs.  

Underinsurance gives a dangerous illusion of safety when, in reality, it leaves dependents financially vulnerable. Understanding what underinsured means and actively avoiding it is just as important as buying insurance itself.

What Does It Mean to Be Underinsured?

Being underinsured simply means that the life insurance cover you’ve chosen is not enough to replace your income, repay your debts, and support your family’s long-term financial goals in your absence.

Example: A 35 year old earning ₹12 lakh annually buys a ₹25 lakh term plan because it seemed “affordable” at the time. But if something happens to them, the family will receive only ₹25 lakh - an amount that may barely cover two to three years of expenses, leaving nothing for future milestones like a child’s higher education or loan repayment. That’s underinsurance in action.

Risks of Being Underinsured

Financial Strain on Family:

The most obvious risk is that the payout won’t match the family’s expenses. If your dependents rely on your monthly salary for groceries, school fees, and household bills, a small insurance payout will run out quickly, resulting in lifestyle disruptions and stress at an already difficult time.

Debt Burden:

Home loans, car loans, or even personal loans don’t disappear after you. If the insurance amount is too small, your family could be forced to sell assets or dip into savings just to clear outstanding EMIs.

False Sense of Security:

This is perhaps the biggest danger. With a policy in hand, many people feel they’ve “done their bit” for financial security. But in reality, inadequate cover leaves loved ones just as exposed as having no policy at all.

How to Check If You’re Underinsured?

If you’re wondering whether your own policy is sufficient, here are some practical checks that help paint a clearer picture of where you stand today:

Income replacement rule:

A common rule of thumb is to have cover worth 60 minus your age times your annual income. For instance, if you earn ₹10 lakh annually, and you are 40 yrs old, your insurance should be 60 minus 40 i.e. 20 times of 10 lakh= ₹2 crore. Anything less could mean underinsurance.

Factor in liabilities:

Add up loans like housing, car, or education loans. If your cover doesn’t at least match this amount, your family may inherit debt.

Future goals:

Beyond current expenses, think about long-term needs, such as children’s higher education, retirement savings for your spouse, or ageing parent care.

Use online calculators:

Tools like a term insurance calculator give a realistic estimate tailored to your situation.

How to Avoid Being Underinsured

Buy Adequate Cover Early:

When you’re young and healthy, premiums are much lower. Locking in a higher cover early on not only costs less but also ensures you don’t postpone the decision until responsibilities pile up.

Review Your Policy Regularly:

Life is dynamic - you may get married, take on a new loan, or welcome a child. Each of these milestones should trigger a review of your cover. What worked five years ago may not be enough today.

Consider Inflation:

₹50 lakh may sound like a big number now, but two decades later, rising costs will eat into its value. Always choose a cover that factors in inflation, or opt for plans that allow your cover to increase over time.

Choose Riders Wisely:

Critical illness, accidental death, and disability riders can provide additional safety nets. Without them, your family could face financial gaps in case of non-death contingencies.

Solutions For You

We have a range of life insurance plans designed to keep you adequately covered at every stage of life. With features like:

• Flexible term insurance covers that allow you to choose protection aligned with your income and goals.
• Return of Premium (ROP) options, so you can get back your premiums if you outlive the term.
• Increasing cover plans that automatically raise your coverage to match growing responsibilities.
• Rider benefits to protect against critical illness or disability.

Conclusion

The right approach to buying insurance is to calculate your real needs, factor in debts and future goals, and regularly review your cover as life evolves. For maximum value, you can choose from and buy term insurance plans that provide high coverage at affordable premiums.

Frequently Asked Questions

1. How can I know if I am underinsured?

Check whether your cover is appropriate times your annual income depending on your age and income, plus enough to cover debts and future goals. Online calculators can give you a quick reality check.

2. What are the risks of being underinsured?

The main risks include your family struggling to meet daily expenses, being burdened with unpaid loans, and suffering from a false sense of security that crumbles when the policy payout falls short.

3. What’s the difference between underinsured and uninsured?

Uninsured means you have no life insurance at all. Underinsured means you do have a policy, but the cover amount is too low to provide real financial protection.

4. Can I increase my life insurance cover later?

Yes. Many insurers, including Bandhan Life, allow you to increase cover at major life stages like marriage or parenthood, or you can purchase additional policies as your needs grow.

5. What happens if someone is underinsured and passes away?

The insurer will pay the sum assured as per the underlying policy, but if it’s not enough to meet the family’s needs, dependents may face financial hardship, debt, or compromised future goals.

Note:

Insurance gap [1]: Asia Life and Health Consumer Survey 2025 by Swiss Re