Majority of middle class families in India don’t think too much about insurance . They just pay the yearly premium and get over with it . They don’t choose the policies , rather a friend or an insurance agent suggests them .

Their philosophy is simple that since they are paying premium for the insurance , they hope they will get financially protected when something goes wrong . That actually makes sense , for a typical middle class family , insurance means a security against contingencies . It is a way to protect their lifetime savings from draining by a medical emergency .

But here comes the twist , with only a superficial knowledge of insurance , many believe they are at least sorted for a year . This is not being responsible but taking financial protection for granted . So , here we will look at 7 ways middle class Indian families mislead themselves by blindly selecting insurance for medical emergencies.

1) Linking Insurance With Investment

The primary and possibly the only purpose of an insurance is to provide financial protection, not necessarily to generate returns . Despite that many middle class families prefer the LIC endowment plan or money-back policies , where it is stated that ” Pay premium for 10 years & you will receive this much amount when maturity is hit . ” The problem is when you compare the amount returned upon maturity with policy duration , inflation and total premium paid . You realize that the returns were quite modest and could not even beat a basic FD return .

A report by The Economic Times showed that the average interest rate returns of these traditional insurance schemes is just 4.8%

Parameters	Insurance + Investment Policy	Term Insurance + Investment
Annual premium/investment	₹1,00,000	₹10,000 term insurance + ₹90,000 investment
Life cover	₹10 lakh	₹1 crore*
Policy period	20 years	20 years
Amount invested separately	₹0	₹90,000/year
Investment return assumption	~5% IRR	~10%
Approx. maturity corpus	₹33 lakh	₹51 lakh
Main purpose	Insurance + savings	Protection + wealth creation

*Illustrative purposes only , actual figures may vary by person .

2) Treating an Agent’s Advice as Personal Financial Planning

Trusting insurance agents blindly for your personal financial decisions is quite a risky game which middle class families are always willing to play . One of the biggest reasons middle class families buy these wrong insurance policies is because majority of the time these agents are either their close friends , relatives or family members . So instead of asking for the technicalities , they buy it as a form of obligation . Years later , they find that they have been paying high premium for a minimum coverage .

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3) Keeping Insurance Coverage Too Low

The biggest mistake the middle class Indian families commit is that they treat insurance as an expense rather than an investment . “I am fit – what could possibly happen to me ” , “Till date nothing has happened to me , i won’t be getting any of those premiums that i paid , better to buy the cheapest policy available .” The indirect purpose insurance serves is that it protects the family , if the only bread earner is lying in a hospital bed .

In India , around 89% of the households are excessively dependent on a single breadwinner. They all are a single hospital bill away from falling down to a vicious debt trap . Along with this , people generally overlook the rise of hospital expense in future while calculating the perfect coverage for their insurance . A 5 lakh coverage would be good now but 5-6 years from now the same amount would not provide you the same facilities that you are getting right now .

4) Relying Entirely on Employer-Provided Health Insurance

Middle Class employees generally get a false sense of security by thinking ” I already have insurance from the company , I am set for life .” But this coverage would remain only till you have the job , the moment you are out of this job or retire , this employer provided cover would cease to exist . Also after that taking a new personal health or life insurance would be quite expensive because you are older and your health profile might as well have changed .

The other issue is that the employer cover often provides a basic coverage , under which long term hospitalization for a long would not be possible . One should not treat company provided policy as your financial protection – you may treat it as a first layer , while getting a separate personal policy for yourself .

Also check out : Middle-Class Parents Invest in Their Child’s Future—But Forget Nutrition

5) Focusing on Premium Instead of Coverage

After learning that lower premium tends to offer lower coverage , the middle class families have evolved themselves into paying high premium but without learning about its coverage. Due to the superficial knowledge they have started to believe that high premium means high coverage . They don’t read the policy thoroughly , they miss reading the exclusions , deductibles , sub-limits and claim procedures . As per a survey conducted by CoverSure , 80% of Indians don’t know what their insurance policy covers . 50% of health insurance buyers have cover that won’t cover a crisis .

6) Hiding Medical Information to Save on Premium

Another common mistake middle class families make while applying for insurance is that they hide medical information just to lower the premium that they have to pay . Some people may have hypertension , diabetes , someone who is a chain smoker or any chronic disease but they prefer to deliberately leave it out while filling the form thinking it might save them money on premium for the insurance . Saving a few thousand rupees now can lead to a bigger issue when a serious claim arises .

A study carried out in 2023 reveals that 25% of the rejected claims were linked to non -disclosure of pre-existing diseases like diabetes , hypertension which the patient had before he got the insurance .

IRDAI itself says that hiding pre-existing diseases can lead to claim disputes ,rejection or even cancellation of the policy . The main aim should not be to get a cheaper insurance but it is to get a better policy which would protect your finances at the time when you really need it .

7) Not Reviewing the Policy After Buying It

For a middle class bread earner it is very important to review their insurance regularly . Most of the times , they just enable the auto pay button to pay the yearly premium and forget about it altogether . But over the time , things change , over the period of 5-10 years , people begin to age , your parents may have retired from their jobs= and have become old.

Earlier you may have been single , but during this period you may have gotten married and now have 4 year old child . Your income , liabilities , lifestyle and number of people dependent on you may also have changed over the years .

A 5 lakh rupees coverage that would look good 5-10 years ago for a single person may not be enough for a 5 member family including ageing parents , also considering the inflation which has increased the medical and hospitalization cost over the years . As per Swiss Re research report in 2022 , India’s mortality protection resilience was only 9.2%, meaning the coverage of the insurance was less than 10% of the total estimated needs .

Just like you review your investment or equity portfolio , it is also mandatory to review your insurance policies at regular intervals . Because if your insurance cover is insufficient for your family , then in case of any major medical catastrophe hits your family , you may well have to liquidate your entire investment , sell assets or take debt to fund the hospitalization bill .

Conclusion

Insurance is not something which is happening as per plan , it is something that happens when there is a disruption with the plan . A typical middle class Indian family earns , saves and invest for the entire life to have a peaceful retirement but one such medical emergency or loss of bread earner can ruin all their savings , investments and assets that they held upon through out their working years .

The real value of insurance is not the premium you pay but the financial damage that you don’t have to bear by yourself .Financial literacy is not about how much you save and invest but also how much you are willing to go to protect it.