When was the last time you reviewed your insurance portfolio?
Most people I meet cannot give me details of the insurance policies they have bought in past. They don’t know what they are paying for and if the insurance policies take care of their needs. This is akin to venturing into sky-diving without the relevant gears required to protect you. In insurance parlance, this gap between the resources required to maintain the living standard and resources readily available is called protection gap. Protection gap is best understood with the help of the following diagram that takes the example of mortality protection gap. Similarly, the gap in health protection is referred to as morbidity protection gap.
The first step to fill the protection gap is to identify it. And that’s where ISLEY comes in — the insurance buddy, which apart from many other things, gives you a 360-degree view of your insurance portfolio. The next step to fill the gap is to compare what you have with what you need and hence it becomes crucial to review your insurance portfolio regularly!
Put simply, buying insurance is like buying clothes for kids. At the time of purchase, they seem to fit well but tend to become inappropriate as they grow up. And in some cases, the clothes become irrelevant. For example, when the kid develops fashion sense and decides to go for a complete makeover of the wardrobe. The rationale to review the clothing requirement is abundantly clear. Now let’s dive a bit deeper and understand the need to review your insurance portfolio.
Life is dynamic and so should be your insurance portfolio. For example, while a sum assured of SGD 200,000 for a life insurance plan might look appropriate in your 20s, it would certainly leave you exposed in your 30s. In about a decade you would have possibly got married and have had kids. In an unfortunate event of demise, a lot more money would be required for the family!
When you hit the 40s and have bought a house, the life insurance cover should also go up to take care of outstanding loan. Additionally, the cover for health insurance should also be revised to account for the increased chances of falling ill. The fact that inflation would make hospitalization expenses costlier further makes the case for the increasing cover stronger! It might also be a good idea to start building a corpus for retirement and children’s education (that is, if you haven’t started already) and hence would require you to add endowment and investment-linked policies in your portfolio.
Sometime in the late 50s your children would start getting independent and hence it would be wise to reduce your life insurance cover as now they can fend for themselves. When you approach the 60s and are about to retire, it would help to buy annuities to take care of expenses for the lifetime. Hopefully, by then, endowment and investment-linked policies would have matured to enable you to buy annuities. Additionally, once you stop earning life insurance becomes less relevant but medical and health insurance become high-priority.
Clearly, there is merit in reviewing insurance portfolio periodically. The argument gets only stronger when we bring the other essential insurance covers into the picture. Some of these include
· Income Protection: To compensate for the reduced earning after sickness. This comes handy when you are sick and cannot go back to work or if you are able to go back to work, the capacity to earn reduces. For example, a surgeon is unable to perform surgery because of shaky hands but he can still work a physician. This implies while he can earn, his earnings would reduce. The insurance cover becomes all the more important when you have started as a freelancer and your organization is not there is support you.
· Home Insurance: To protect you against financial losses due to unexpected dangers like fire, floods and theft. After all, it wouldn’t be wise to leave your most prized possession uncovered.
· Personal Accident Insurance: To make up for the financial losses resulting from accident and disablement. This becomes crucial when you switch to a job that is relatively risky leaving you prone to accidents.
The list goes on and your financial adviser should be able to help you with it. The point I want to drive home though is that just like the tailored suit, the insurance policies need to be tailored to suit your requirements and changing needs. Buying insurance is important but reviewing it regularly is crucial!
I hope this article equips you to ask right set of questions from yourself and the financial adviser leading to review of your insurance portfolio. I would be more than happy to answer any queries regarding this article or any life insurance query. Feel free to reach out to us at hello@fidentiaX.com. Just to remind you, I would be live again on Twitter to answer any life insurance related queries at 8 PM Singapore time on 29-October-2018 i.e. this Monday!
PS: The info version of ISLEY is already available for Android phones and should be in App Store shortly!
Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The readers are recommended to take advise from their respective financial advisers before taking any financial decision.
About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.