How to find out if you have wrong insurance policy and what you should do?

Ten insurance policies should be enough to give adequate cover to a couple. At least that's what Mumbai-based Madhukar Avhad and his wife Leena (see picture below) thought when they bought three endowment policies, three money-back plans, a whole life policy and three Ulips.

However, the cover is far from adequate. The 10 life insurance policies, for which the Avhads pay an annual premium of Rs 1.25 lakh, give them a combined cover of only Rs 20.6 lakh. Madhukar's insurance of Rs 13.6 lakh is not even enough to cover his outstanding home loan of nearly Rs 15 lakh.

The Avhads are not alone. After bank deposits, life insurance is the most favoured financial investment for Indians. Almost 20% of their total household savings flow into life insurance. The question is whether this money goes into the right policies.

The average cover offered by life insurance policies bought in 2010-11 was Rs 1.83 lakh, which is woefully low. A recent study by US-based financial planning giant, Ameriprise Financial, says that Indian investors tend to buy the right products, but for the wrong reasons. Only 56% of the respondents had bought life insurance to cover the risk of early death. Other buyers either sought high returns or tax benefits.

Does your insurance portfolio also resemble the collage of policies that the Avhads have collected over the years? Your insurance plans may not necessarily protect your family. As in the Avhads' case, a large number of policies does not translate into adequate protection.

Before you buy an insurance policy, ask yourself if you really need one. In certain circumstances, you may not even need life insurance. If you do not have dependants, who are you buying it for? Also, if your spouse earns well, he or she may not require any financial support when you are gone. More importantly, as you build assets, your insurance needs decline. As the table ( next page ) shows, a person's liabilities go up with age, but the increase in his asset base brings down the insurance requirement to a certain extent.

The life insurance needs of an individual depend on several factors. There are also different ways to calculate this need. One is the human life value approach, which calculates the value of your life based on your future earning potential. The logic is that the family suffers financial loss due to the death of the income earner. For the same reason, there is no need to insure children and housewives, says financial planner Gaurav Mashruwala.