Expert Speaks – Are you “minding” your “gap”? – Part 1
The phrase “Mind the Gap” was first introduced in late sixties on London Underground to warn train passengers to exercise caution while crossing the gap between the train door and the station platform. Having originated as a utilitarian safety warning, over the years “Mind the Gap” has turned into a stock phrase and today used in many other contexts having nothing to do with transport safety. Here, we are discussing it in the context of one’s family’s financial protection against the IF’s of Life.
An interesting report published in September 2011 by the leading global reinsurer Swiss Re, highlighted the huge “Mortality Protection Gap” in the Asia Pacific. The “Mortality Protection Gap” here refers to the difference between the life insurance cover people have and what they should have. The report revealed a startling Protection Gap of US$ 41 trillion for the Asia Pacific Region and India surfaced on the third spot in the list with a staggering “Protection Gap” of over USS 6.67 trillion, which when translated in Indian Rupee is well over Rs. 374 lakh crore ($1 = Rs. 55). This implies that for every Rs. 100 that needs to be spent on Life Insurance Cover in India, only Rs. 7.4 is actually spent on life insurance and savings put together – leading to a GAP of 92.6% in our family’s financial protection against the IF’s of Life. To make things worse, this gap is growing at a CAGR of 13%.
Most of us are oblivious of this huge GAP. It’s time that each one of us dwelled into our personal “Protection Gap” at the earliest and do something about it.
The primary objective of life insurance is to enable one to protect his/her family’s “Standard Of Living” or “SOL”. If asked, none of us under any circumstance is ready to compromise on one’s family’s SOL. But this huge “Protection Gap” highlights the fact that what we may not want to compromise, is actually being compromised, because we hardly buy adequate life insurance. Adequate life insurance cover is that which ensures that in case of an unfortunate event, the life insurance proceeds provide the dependant family with sufficient financial income that will enable them to maintain the same “Standard Of Living”, as before the unfortunate event. It is thus essential that one appreciates the importance and need of adequate life insurance and plan for it accordingly.
Vijay Sinha – Chief Marketing Officer, Bajaj Allianz Life Insurance Company.
(Instructions: Explain the example through an infograph)
To understand how much life insurance is enough to maintain one’s family’s SOL, let’s look at an example. A Rs. 50 lakh cover will provide a monthly income of Rs. 25,000 at an assumed long term rate of interest of 6% (Assuming that the family would put the life insurance money in a safe instrument like a Fixed Deposit which over the long term generates an average interest of 6% per annum). Now let us ask ourselves a question – is Rs. 25,000 per month enough in today’s time to maintain the “Standard Of Living” or SOL of an urban middle-class family? The fact remains that despite this, many of us in India may not even have a life insurance cover of Rs. 50 lakh. As per data of in-force individual business (Policies and Sum Assured) published in the Insurance Regulatory and Development Authority (IRDA) Annual Report for 31st March 2011, in India the average sum assured per in-force life insurance policy is only Rs 1,17,144. This shows how grossly underinsured we are – as a nation.