Saturday, 6 September 2014

Calculating your need before buying insurance

Mis-selling in insurance is prevalent and is one of the key reasons that is hurting the sector's growth is a fact accepted by the Finance Minister, P. Chidambaram himself on several occasions. Though the intermediaries are first to be blamed for it—an agent only pushes products that earn high commission—is the most popular reasoning given. However, there are several other reasons why a customer ends up buying a wrong product. For instance, it is not always 'mis-selling' but sometimes 'mis-buying' as well—lack of awareness, expectations of quick returns and using insurance as a tax saving tool, to name a few. 

There are challenges faced by financial planners as well to convince a client why a 
product is right for them, to get the correct and complete data from them for proper assessments of their profile and portfolio. 

To tackle these procedural challenges, a few years ago, Irda had proposed carrying out a 'customer need analysis' before selling a life insurance product. 


Irda's draft guidelines issued in January 2012, proposed a mandate on intermediaries and the insurance companies to fill up a standard need-analysis worksheet of the customer before effecting the sale of a life insurance policy. This was to ensure that the product that is proposed to be sold is suitable for the prospect and meets his or her needs. This also aimed at tackling under-insurance, which is widespread among insurance buyers. 

Though the proposal has not been implemented in the proposed format, a few insurers like Birla SunLife, 
ICICI Pru Life and TATA AIA life have introduced a few need analysis tools. 


LIFE-STAGE ANALYSIS: Your needs are different at different life stages. Therefore, the need-analysis approach starts by understanding the life stage you are at— unmarried, married, married with children, nearing retirement and post-retirement —are the common stages in a product matrix. Once you've selected a life stage, your protection needs are analyzed. For instance, a person raising a young child will definitely have bigger insurance needs than say a young and single person who has just started his career and does not have any dependants. Then, these protection needs also decreases once dependents become independent and loans are closed, that is, when you are nearing retirement or retire. 

GOAL PRIORITIZATION: Next comes assessing your goals and purpose of buying insurance. Do you want a plan for your child's future education needs or accumulate a corpus for your sunset years? 

The need for savings and investment are related to the achievement of various financial goals and therefore the product you buy should be able to support these requirements. For instance, while you may need to save for a house from an early life stage, the need for annuity or regular income typically arises after retirement. Also, the need for health cover increases with advancing age. 

Based on your goals and their prioritization, the need analysis tool will help you calculate your exact requirement in terms of numbers. For instance, for calculating your protection needs and arrive at a sum assured, the tool will use a HLV or The Human Life Value method which calculates your insuranceneeds based on your current income and expenses, rate at which these two are expected to go up and any outstanding liability, say, a housing loan. It then multiplies this to the number of years for which these expenses/your income will continue (usually number of years to retirement) and give you a cumulative figure. It also includes any major future expense, say children's educational and marriage expenses. From the HLV, the current insurance cover can be reduced to arrive at your additional cover requirement. 

Similar calculation tools are available for retirement planning, goal-based long-term wealth creation, health insurance needs, etc. 

PRODUCT RECOMMENDATION: This is followed by the 
product recommendation, which also has prioritization. So, if you do not have enough life cover, you should get additional protection before you invest in, say, a savings plan or a unit-linked product. Similarly, a retirement plan will be more important than say a short-term goal like purchasing a car or a foreign holiday. Once, the long-term goals (more than 10 years) are on track, you can focus on medium and short-term goals such as buying a house or child's education. 

The maturity proceeds of savings or investment plan sold to the customer should be adequate to meet the goals for which the product has been sold, however, the 
premium for the same should be affordable as well. The premium-paying frequency should be set accordingly. For instance, for long-term goals you should ideally be investing in a regular-premium plan. On the other hand, for say, investment bonus, sudden windfall or retirement benefits, single-premium products can be appropriate. People with irregular income should also be opting for single-premium plans. Risk-profiling is important as well—an endowment plan may be more suitable for a conservative investor than an equity-linked Ulip. 

These interfaces are available both on the company's websites as well as intermediaries. So, next time, don't just buy what is being recommended. Use these tools and asses your insurance requirement before filling up the 
proposal form.

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