Insurance is regarded as a kind of safety net- a promise of peace of mind in times of uncertainty in life. The thing is, though, not every insurance coverage is the same. Millions of individuals and companies are oblivious to the fact that they have a kind of an ‘invisible hole’ in their safety nets, and this ‘hole’ is called underinsurance. It is similar to purchasing an umbrella , only to discover later that only half your head is covered by it, when it rains.
Well, what is underinsurance then? What causes it and what can you do to prevent it? We shall examine this silent risk in detail. Read on!
Underinsurance : A Brief Overview
In its most basic sense, underinsurance refers to an insurance coverage that is lower than the worth of the risk or asset being covered. That is, you are insured, yet not adequately.
Consider the following situation: You have insured your house at ₹30 lakh, yet the actual cost of replacing the house is ₹50 lakh. A fire destroys your property and the claim settlement is based on the insured amount and not the actual cost. The sting of underinsurance is that shortfall, which you have to pay out of pocket.
The distinction between insurance and underinsurance is based on sufficiency. Insurance provides a financial shelter against loss whereas underinsurance creates loopholes that can prove financially catastrophic when claims are made.
Underinsurance in India is more prevalent than what meets the eye. In a report published in 2022, the IRDAI indicated that close to 80% of households are not adequately insured as far as health coverage is concerned. It also said that SMEs usually do not insure their assets to the replacement value.
Why Underinsurance Happens
Underinsurance does not occur immediately. Rather, is most much of the time a silent creep, and usually it comes as a result of choices that people make when they are buying or renewing their cover. The most typical causes are:
- Insufficient Sum Insured Compared to the Actual Value
Policyholders tend to select a sum insured that is below the actual value of the asset, property, or life that is being insured. This misfit is one of the biggest offenders of underinsurance.
- Failure to Update Policies as Life or Business Grows
Life evolves- salaries increase, families grow, and business ventures obtain new properties. However, insurance coverage tends to become frozen in time, thus leaving an invisible gap.
- Inaccuracy in the Assessment of Risk and Insurance Coverage Requirements.
Numerous individuals think that risks are not as high as they are. An example is having a mindset that “I am young, I do not require high health insurance”. This mindset can be counterproductive when a medical emergency occurs.
- Attraction for Low Premium Policies
Lower premium policies are too alluring at times. But, they are normally accompanied with a low coverage. When affordability is chosen as an alternative to adequacy, it preconditions underinsurance.
Different Types of Underinsurance
Underinsurance isn’t confined to just one area. It spreads across different categories of insurance, often in ways people don’t recognize until it’s too late.
- Underinsurance in Life Insurance
Most Indians buy life insurance with the idea of protecting their families. Yet, according to industry estimates, the average life cover is only 7 times the annual income, while financial planners recommend at least 10–15 times. This gap of insufficient insurance means families may struggle with daily expenses, education, or debt repayment if the breadwinner passes away.
- Underinsurance in Health Insurance
With rising medical inflation in India (nearly 14% annually), a ₹5 lakh health cover that seemed sufficient a few years ago may barely cover one major surgery today. Underinsured health policies force families to dip into savings or borrow money during medical emergencies.
- Underinsurance in Property and Asset Insurance
From homes to factories, many assets are insured at “market value” rather than the true “replacement cost.” If a business insures machinery worth ₹1 crore for only ₹60 lakh, any claim will result in proportionate settlement, leaving the owner liable for the shortfall.
- Underinsurance in Business Insurance
For SMEs and startups, underinsurance is especially risky. Not insuring against business interruption, cyber risks, or liability exposures can result in severe lack of financial protection even closure after a major incident.
Real-World Examples of Underinsurance
The consequences of underinsurance are not just financial—they are deeply personal and often heartbreaking.
- Financial Pressure on Individuals
Consider a family that loses their breadwinner with a life cover that can barely pay off outstanding loans. Unexpectedly, what was meant to be financial security, now becomes a struggle to survive.
- Losses for Businesses During Claims
A factory fire, which destroys raw materials worth ₹50 lakh and is insured to a policy limit of only ₹25 lakh, leaves the business owner in scrambles to recover the loss. A lot of SMEs can close down following such blows.
- Impact on Families Following Unanticipated Events
A single hospital bill can drain years of savings in case the health insurance coverage is insufficient. To make ends meet, families may even need to sell assets or acquire debt.
- Example of Underinsurance During Chennai Floods
In 2015, during the Chennai floods, many homeowners found that their property insurance policies did not cover flood damage. This exposed them to inadequate insurance, against one of the worst calamities in decades.
What are the Signs of Being Underinsured?
How do you know if you are walking around with an insurance umbrella that’s too small? Here are some red flags:
- Your sum insured is far below the actual value of your home, car, or business assets.
- Medical bills from recent hospitalizations exceeded your policy’s coverage.
- You have experienced high out-of-pocket expenses despite having “comprehensive” policies.
- Your life cover will not sustain your family on a long-term basis -but just for a few years.
- Your policy is not revised or updated during the past 3 to 5 years even though there are significant changes in your life or business.
Consequences of Being Underinsured
Underinsurance is as if holding water in a leaky bucket–you think you are okay and then you get a wake up call. Some consequences include:
- Partial Claim Settlements
Insurers use the “ average clause”, where the claims are proportionality decreased in case the sum insured is lower than the actual value.
- Legal and Financial Liabilities
Inadequate liability coverage may lead to lawsuits or fines which can compound financial problems for businesses.
- Increased Debt Burden
Businesses and families usually borrow money to meet the deficit following a claim, which may bring them into a vicious trap of debts in the long run.
- Setbacks in Long-Term Financial Security
Savings means for children’s education, retirement or future growth are diverted to meet differences brought about by underinsurance.
How Can You Avoid Underinsurance?
The good news? Underinsurance can be avoided with proactive steps. Here’s how:
- Assess the Actual Value of Assets and Risks
Always insure at the replacement value, not depreciated or estimated market value. - Periodic Review and Update of Policies
Conduct an insurance health check every year or after major life/business changes. - Consult Insurance Advisors for Adequate Coverage
Professional advice ensures you’re neither over-insured nor underinsured. - Factor in Inflation and Lifestyle Changes
What covers today may not be sufficient tomorrow. Adjust your coverage with inflation and changing needs. - Avoid the Trap of Low Premium-Only Decisions
Instead of chasing the cheapest policy, look for value-driven coverage that truly safeguards you.
Role of Insurance Companies and Advisors in Preventing Underinsurance
Insurance companies and advisors play a critical role in preventing underinsurance.
- Transparency in Policy Offerings
Clear explanations of inclusions, exclusions, and conditions help policyholders make informed decisions. - Tools and Calculators to Estimate Right Coverage
Many insurers now offer digital calculators that help estimate the ideal sum insured for life, health, and property. - Importance of Disclosure During Policy Purchase
Policyholders should share accurate details about their health, lifestyle, and assets to ensure adequate coverage and avoid disputes later.
Final Thoughts
Underinsurance is the hidden ‘devil’ that can remain unnoticed until the moment of crisis arrives. It can be the lack of life cover, insufficient health insurance or undervalued assets, but the financial impact of this can be devastating.
The reality is that insurance is not just a matter of filling out a check-box or paying the lowest premium. It is a matter of making a safety net that is resilient enough to withstand storms in life.
You should have a look at your policies and calculate how well your coverage is suited to your specific needs. If you have not yet done so, now is the time. Do not wait not till a ‘storm’ enters your life. Do bear in mind that insurance is just as good as its adequacy. Anything less than this is underinsurance, and that is not a risk which should be taken at any cost.
