Facing a diverse set of products in the market, a prospective policyholder can bungle up an insurance purchase, either due to lack of product awareness or inaccurate self-assessment of risks. Unless one is clear on the events that need to be insured, the right age at which the risks peak and the right amount of protection to mitigate the risk, even a right category of product can under-serve one’s needs. Since insurance is tested in times of adversity, it may be prudent to check one’s portfolio of insurance products, existing or prospective, for a suitability analysis based on the four listed measures.
The right asset
Insuring the underlying drivers of an asset may be more important that insuring that asset. For instance, in most Indian households, upon the birth of a child, a barrage of traditional insurance products is suggested to safeguard the future of the child. But, the foremost asset to insure in this context has nothing to do with the child itself but the earnings capability of the parents. Term insurance on the life of the parent would be the ideal fit in such cases.
On the contrary, guaranteed return products may serve retirement planning where the asset one insures is the financial security of the individual (or nominee) and not the life of the individual himself. In such products, a large portion of the premium would be devoted to ensuring a stable stream of cash flows in sunset years and not the health or life of an individual. Even in health insurance, one has to realise that medical expenses that have a higher probability of occurring in older years is the liability one is insuring against.
Timing the purchase
As was brought home clearly in 2020 by the Covid-19 pandemic, there cannot be a wrong time to buy health insurance. But if done earlier, one can not only purchase it cheaper but also get through the mandatory waiting period (for pre-existing diseases) at a younger age. The same applies to term insurance as well - the earlier, the cheaper. Additionally for term insurance, the scope of income growth is higher and longer in younger years (25-30), making it a straightforward purchase at that age to cover the risk that the earnings may stop flowing for the dependants. On the other hand, retirement planning can begin on the day of retirement (purchasing immediate annuity) or purchasing deferred annuities - deferred by maximum of 10-12 years post which annuities are paid.
The right sum assured
A rupee of annual premium paid in term insurance provides cover of 20-25 times (for a 30-year-old male paying premiums for 25 years) and is the cheapest way to insure one’s lifetime earnings capability. If one opts for a life insurance with 3-4x returns, the earnings potential may remain unhedged.
In retirement planning, inflation is the main risk that is unhedged and may require investing as much as possible in the early years to ensure a bigger corpus so as to hedge for inflation during the payout period. One way to decide on how much to save is to utilise the inflation of past to provide for a higher retirement corpus. Simply put, equity investments of the saving years should be utilised to provide for the upfront purchase of guaranteed products., if you intend to use guaranteed income products in your silver years.
Revisions
An insurance product lasts for 20-25 years and along the way an individual’s risk profile changes. In health insurance, fine-tuning the policy to his/her needs can be achieved with appropriate add-ons - critical illness, top-ups, personal accident, or foreign covers along with accumulating a no-claim bonus. And this fine-tuning is possible only with personal cover as against relying solely on employer-provided health insurance. Term insurance may need revisions on expansion in either family, earnings, or liabilities (housing loan), during mid-life. Even as these revisions will be at a higher premium, the first block (of sum assured) will still be at a lower cost.
Similar to investment portfolios where you take exposure to different asset classes and re-examine allocations from time to time, you must adopt the same approach to nsurance.