The Insurance Trap: Too Much Cover Can Hurt Your Finances Too

Agents earn commissions as high as 35 per cent on endowment plans, compared to almost nothing on term or health insurance. That incentive shapes what gets sold.

A useful rule of thumb: total insurance premiums should not exceed 10 to 15 per cent of your annual income.

Source : ABPLIVE AI

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• Base cover on pure term, avoid employer-only health plans.

Most Indians worry about not having enough insurance. But financial planners say the opposite problem, paying for far more coverage than you actually need, can be just as damaging to your finances.

Over-insurance happens when someone holds multiple policies that cover the same risks, or pays premiums that are simply too high relative to their income. Underinsurance, on the other hand, means your coverage is too thin to actually protect you when something goes wrong. Planners say both are surprisingly common, and both stem from the same root cause: people buying insurance without fully understanding what they are buying.

What Over-Insurance Actually Looks Like

Nearly one in three urban Indians holds more than one life insurance policy, according to industry estimates. A large share of these policyholders do not know how their plans overlap.

The most common pattern involves ULIPs and endowment policies sold as investment or savings products. These plans charge significantly higher premiums than basic term insurance while delivering returns that, after inflation, often match little more than a fixed deposit. Agents earn high commissions on endowment plans, compared to almost nothing on term or health insurance. That incentive shapes what gets sold.

A useful rule of thumb: total insurance premiums should not exceed around 10 to 15 per cent of your annual income. Someone earning Rs 10 lakh a year, paying more than Rs 1 to 1.5 lakh in combined premiums, should review their portfolio.

Why Being Underinsured Is Still the Bigger Crisis

While over-insurance drains money quietly, underinsurance can be catastrophic. IRDAI data shows that only three in ten Indians have adequate life insurance coverage.

A single hospitalisation at a private hospital can cost between Rs 3 lakh and Rs 7 lakh today. Cardiac surgery routinely crosses Rs 5 lakh. Many families carry health cover of Rs 3 to 5 lakh, bought years ago, which is no longer sufficient for current medical costs.

Life cover is similarly thin. Planners usuually recommend a term cover worth 15 to 20 times your annual income. For someone earning Rs 8 lakh a year, that means a cover of Rs 1.2 to 1.6 crore. 

Common Mistakes That Planners Flag

One of the most frequent errors is treating an employer-provided group health policy as sufficient coverage. That cover disappears the moment you resign, retire, or are laid off. People often discover this at 45, when individual premiums are far higher and pre-existing conditions have begun to appear.

Buying insurance purely for tax savings is another trap. Section 80C benefits should be a secondary consideration, not the reason a policy is chosen.

Finally, incomplete disclosure of medical history remains the leading cause of claim rejection in India. Over half of rejected life insurance claims involve inaccurate or incomplete information at the time of purchase.

Review Your Cover Once A Year

Insurance needs change. Marriage, a child, a home loan, a job switch or retirement all alter what coverage is appropriate. Planners recommend a full review at least once a year, or after any major life event.

The goal is not the most insurance. It is the right insurance.