Is your life insurance portfolio complete?

People believe that buying life insurance is a one-time activity, which is not the truth. Evaluating life insurance needs should be an ongoing activity conducted by individuals irrespective of their profile. In this article, we explain the rationale for conducting this activity.

Let us take an individual who is in his mid twenties and has just begun his career. At a young age, when he has just started earning, buying a term plan makes sense. A term plan is a pure risk cover plan where only the administration expenses and mortality charges are recovered from the individual. There's no savings element, hence no returns are received on maturity.

A term plan provides individuals with a high sum assured at a low cost (i.e. premium). And given that the individual's income stream has just begun, the earnings may not prove high enough. This is where a term plan fits in. Also since the primary function of life insurance is to indemnify the ‘financial loss' to the nominees/beneficiaries in case of an eventuality, a term plan performs this role to perfection.

Besides a term plan, the individual can also build a corpus for himself for the future by investing some money if possible in other insurance products. The savings may be for various reasons like buying a house or your own retirement. He can invest money in an endowment or a pension plan depending on his needs.

However, it merits discussion that regular endowment/endowment type plans generally offer lower single digit returns. If invested with a long-term horizon, we believe that unit linked plans (ULIPs) with higher equity proportion have the ability to offer better returns as compared to regular plans. However, selection of the plan should be in tune with the individual's risk appetite as most ULIPs offer a range of options with varying exposure to equity market.

Let us suppose that this individual now in his early thirties gets married. Marriage brings along with it, added responsibilities. The amount of the cover to provide for an eventuality will now have to increase. An additional term plan cover can act as a perfect solution for him.

In addition, he will also have to plan for his children's education and marriage. Children's ULIPs/endowment type plans can fit the bill over here. This need did not exist earlier when he was a bachelor.

The individual will also have to plan for his retirement. The retirement planning exercise should be started as early as possible. He can consider taking a pension plan from a life insurance company. Again, he has the option of buying ULIP/endowment type pension plans depending on his preferences and risk profile.

The individual may also need cover for liabilities in his absence. A classic example is that of home loans. The need for a home loan term cover plan will arise when the individual decides to buy a house. The individual's near and dear ones could be put through a lot of financial stress to make ends meet as well as pay off the outstanding home loan amount in his absence. This is reason enough for him to consider home loan insurance cover.

Despite having planned for most of his needs, the individual will still have to revisit his life insurance portfolio regularly. This becomes necessary if one accounts for the changing lifestyles, which are brought about by an increasing income as the years roll by. For example, in his early forties, the individual may be earning double the income than what he was earning say, 10 years ago. This will make a case for him to revisit his retirement/pension needs and his term cover.

Individuals will also need to revisit their portfolio in case they have not planned for their insurance needs minutely in the earlier years. It is never too late to buy insurance. All things considered, building a life insurance portfolio is an ongoing activity and the moot point of planning to cope with changing needs should not be lost.

From : HDFC BANK News letter

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