There are many people today who either dont think about insurance as something that needs to be managed, or who are not very aware of the policies that they hold.
There are many people today who either dont think about insurance as something that needs to be managed, or who are not very aware of the policies that they hold. Then there are others who believe that simply having a health insurance policy and a life insurance policy is enough. But insurance as a whole is a murky world for the lay investor, filled with unscrupulous agents who are out to con you out of your hard earned money.
This articles aims to help you understand your insurance portfolio and identify what you really need in terms of insurance, in simple, easy to understand language.
At the top most level managing your insurance portfolio is a simple job. As you go deeper into it, you'll see its not so hard after all. Basically, the 4 main steps you need to follow are:
1. Know what you need:
Drawing up an insurance requirement list is just like drawing up a grocery list, only with much more impact on your financial life as a whole. To avoid getting confused by the vast number of insurance types available, identify at the beginning what you are looking for. Broadly, the insurance seeker can have one of two needs a) life cover (through a term plan) or b) investment combined with life cover (through traditional endowment or a unit linked insurance plan). Although the latter sounds like the convenient option, we recommend against it. Going for this option will deprive you of the benefits of selecting the two options i.e. insurance and investment in isolation. In other words selecting life cover or investment separately is more prudent than selecting a combination of both. At PersonalFN, we maintain that over the long-term, you will be better off separating these two objectives.
So basically, you need pure life cover, and health insurance (mediclaim) to start with. But remember, not everyone needs life insurance. There is a small percentage of people who dont need a term plan. If you have enough assets to cover your dependents needs in your absence for the rest of their lives, and you have no liabilities, or if you are retired, or if you are not contributing financially to the household and other expenses, you might not need a term plan at all. We'll go into this in some detail in the next point.
2. Quantify your needs:
Once you have decided why you need insurance its time to answer the question how much insurance do I need? To understand this better let's take the first scenario i.e. you want a life cover. Typically this will involve planning for all future liabilities and commitments as also setting up a contingency fund. Those familiar with the jargon know that we are referring to the Human Life Value over here. You can also assess your Human Life Value (HLV) using our HLV Calculator. On the health insurance side, you can determine how much mediclaim you require based on some practical questions and answers, such as how old are you? how is your health in general? Are you hospitalized often? What hospitals do you prefer? Based on this, you will know how much you are likely to spend on hospital stay and can opt for health insurance accordingly, and also based on other factors such as individual policy features.
3. Select the insurance policy:
As we mentioned at the beginning, one reason why insurance has turned out to be more complicated than necessary is because of the quality of insurance advice. Selling insurance as you are aware can be very remunerative. Not surprisingly, the advice is often biased in favour of insurance products that garner the highest commissions. So you have to be really sure that your insurance advisor is honest and competent and more importantly, from an honest and competent insurance company. If you can't ascertain this easily, insist on references whenever possible. Check his recommendations by asking for comparisons across insurance companies over various parameters. Understand why he is recommending one insurance plan over another. And if he is making claims that seem outlandish to you, don't hesitate to either take it down in writing from him or get a confirmation from a company official.
Another problem with insurance advisors is that many of them are mutual fund agents on the side. While, this by itself does not pose a problem, clients often complain of how their insurance advisor is at times not keen on selling life insurance and invariably makes a pitch for mutual funds. The solution to this problem lies in identifying your needs. If you have decided to opt for a life cover for instance, make sure your insurance advisor gets the point. If he still insists on selling other products then its time to re-evaluate whether he is the right insurance advisor for you. At times, having sold an insurance policy, the insurance advisor is no longer interested in servicing the same. References can play a critical role in weeding out such advisors.
4. Conduct a review regularly:
Like all other long-term activities, you must monitor your insurance portfolio closely to ensure that you are on track to achieve your objectives. For instance, if you have opted for a life cover (in line with your Human Life Value), then you will have to keep a close eye on your liabilities and financial commitments. If there is a discernible upward revision, then your existing life cover may not prove sufficient and you may have to consider taking additional cover. The solution to this problem is to opt for a slightly higher cover at the outset; since pure risk plans are relatively cheap, it will not prove to be expensive.
On the same lines, if you have opted for a health insurance plan that has a cover of say Rs. 3 lakhs, and you find from conversations with your friends, colleagues and families, that medical treatments have gotten a lot more expensive due to burgeoning inflation, consider going for a top up to increase your cover to say Rs. 5 lakhs.
By now you would have realized that managing your insurance portfolio isn't as difficult as it appears. Like any other activity it involves taking decisions, implementing them and monitoring the results closely. Of course, you must remember that you shouldn't depend on your insurance advisor rather you should read your insurance policy carefully. It’s not hard at all and you'll be very glad that you took the time to make an informed decision.
And remember, insurance is part of your overall financial plan.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm