It’s easy to take a call on investments. For instance, with equity markets rising almost 20 per cent in the past three months and the rally looking sustainable, retail investors can either take a call on buying or booking profits. And if stock markets are bad, there are debt instruments like fixed deposits or debt funds or fixed maturity plans where one can invest.
But taking a call on a life insurance cover isn’t so easy. With a rise in salaries and responsibilities, one is often not sure how much insurance is enough. Is five times the gross salary enough or one should get more?
The problem also arises because insurance policies are often bought to save income tax. And many people just keep accumulating policies as per their tax needs. Of course, the market has been vitiated because of rampant mis-selling by insurance brokers.
Any insurance policy cannot be treated as a ‘buy and hold’ strategy like one may want to do with their investments. Some elements that merit a review of insurance needs are discussed. The list is not exhaustive but only indicative.
Review the basis for arriving at the insurance cover:
In the case of life insurance, the coverage chosen for a particular policy is often a function of one of the following factors: premium paying capacity, the extent of liability that one is going to take up, a certain multiple of the annual income earned, amount of wealth that an individual has or in some cases quantification of the various unfulfilled responsibilities of the individual.
After taking the cover, if there is any change in any of the aforementioned factors, then the insurance coverage should be reviewed. For example: If an individual takes a life insurance cover of Rs 75 lakh immediately after the birth of his first child, she should review the coverage required once the kid is around six years of age and again when they turn ten. With the cost of quality education increasing yearly, it is important to ensure that the life insurance cover in case of any untoward incident is sufficient to cope up with the same.
Co-ordination of beneficiaries with your estate plan: A review of the policies is not necessarily in terms of the extent of coverage but extends to other aspects as well. Under section 39 of the Insurance Act, 1938, the holder of a policy of life insurance may at any time nominate the person to whom the money under the policy shall be paid in the event of his death. This nomination overrides the claim of any other heir on the proceeds from the policy. Therefore, at the time of drafting one’s will or their estate plan, it shall be ensured that the beneficiaries as named in the will document for the amount available under the policy is co-ordinated with the insurance document. This will help in avoiding any potential conflicts in the future.
Change in applicable premium rates: In the last four years, the insurance regulator has modified the solvency margins as applicable to life insurance companies on more than one occasion. The change in margins has had a direct impact on the premium rates charged by companies for their term products. In some cases, the premiums have fallen by as high as 30 per cent with the same product of the same company in an individual’s own case despite growing older. Life insurance products being long-term contracts, the companies are not in a position to pass on the benefits of reduction in premiums to existing policy holders. In such cases, if health conditions have not deteriorated, then policy holders would have to change their products either within the same company or can look for competitive rates with different companies.
Performance of policies: For individuals, who have opted to route their investments through insurance policies would also need to keep a check on whether the policies performance is matching up to the envisaged objective. Although investment-backed insurance policies are long-term products, yet a review of the same is essential.
Long-term care provisions: With rising age, close attention needs to be paid to one’s medical coverage. The decision to upgrade from a family floater cover to stand-alone policies for family members needs to be reviewed keenly. Growing children and senior citizen parents would need to be provided for with adequate covers rather than combining all of them in a single floater policy. In recent times, few insurance companies offer top-up plans for medical policies, which are also a cost-effective way to enhancing one’s coverage. One has to look at making provisions for their medical needs of the next five years at the time of review rather than look at their existing health conditions.
Rising income, rising eligibility: The coverage under disability-policies is dependent on one’s average income for last three years. With rising income, the eligibility of the individual also rises. Accordingly, while climbing up the career ladder, the disability provision needs to be increased proportionately.
Along with the above, constant innovation in the insurance industry opens up possibilities for new type of coverage which might not have existed when your last insurance decision was taken. For example: One of the private medical insurance companies has now made available a stand-alone product for diabetes patients, which did not exist a year back. A review will provide the individual to compare new products with the ones in their portfolio and opt for the better.
To conclude, the insurance review, when done proactively, will help provide an opportunity to the individual to address any inefficiency (that might have crept in over the years) in a controlled environment where the problems can be fixed.