While many individuals believe they are on a firm wicket with regards to their investments (read mutual funds, fixed deposits, small savings schemes, among others), they are usually tentative about their insurance needs. The reasons for this are not far to seek. For one, insurance has many options often confusing the individual. Secondly, ‘insurance awareness’ among individuals is very low, which when combined with mis-selling leaves them even more confused.
At a level, managing your insurance portfolio is a relatively straightforward task. It’s all about breaking the process down into simpler steps. Once you have the measure of these steps, you are home. Broadly, managing your insurance portfolio involves four steps:
1) Identify your needs
Like with shopping when a well-defined list helps you focus on the task at hand and avoid venturing into unrelated avenues, drawing up an insurance list can have the same effect. To avoid getting swayed by the plethora of insurance options, determine at the outset 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.
2) Quantify your needs
Once you have decided why you need insurance its time to answer the question – how much insurance do I need? Of course, the answer to this question will depend on whether you wish to opt for a life cover or an investment plan. The reason is because these two questions will have very different answers.
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.
On the other hand, if instead of a pure risk cover, you want to opt for an investment plan, then you will first have to identify the investment objective like retirement or child’s education for instance. Once you have done that, then you will have to quantify the investment amount to answer the question – how much money do I want to save for my retirement? Or - how much money do I want to save for my child’s education?
3) Select the insurance advisor
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. 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 an investment plan for your child’s education for instance, then at periodic intervals (eg. annually) ensure that your investment plan is on course to achieving the desired result. Again, if there is a discernible deviation, it’s time to re-evaluate your investment.
By now you would have realised 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, your insurance advisor will play a key role over here, which is why it’s important to ensure that he is honest and competent.
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