Introduction

Insurance planning involves identifying your insurance needs and developing flexible and cost-effective solutions. It identifies the optimum transfer mechanism for “Insurable Risks” surrounding you to provide adequate coverage against the risks under “Risk Premium – Risk Cover” optimisation principles.

Our day-to-day life is full of unpredictable risks such as loss of life, loss of income, critical illness, and disability, to name a few. Identifying the areas at risk in case of an unfortunate event is crucial and protecting them by getting the proper insurance coverage. Planning for unforeseen circumstances and having the right insurance cover gives you peace of mind as it provides financial support in contingencies.

 Calculating the right level of risk cover is a specialised activity as no two persons face similar risks. Insurance requirements also vary along with age, profile, income, and other factors. Many times, there may not be any takers of the risks. A feasible planning process accounts for most factors while chalking out a customized plan gives you the most suitable option. In the following pages, we have tried explaining how you can go about planning for your risks.

Insurance Is Not Investment 

A problem arises when the purpose is lost, and ongoing studies indicate great confusion about the meaning of insurance, especially regarding life insurance. Therefore, let’s be clear that the purpose of insurance is to replace an economic loss and not to generate profits. Once you are clear about the meaning, putting the suitable risk covers becomes much easier.

Insurance is needed to ensure that you and your dependents maintain the lifestyle and not suffer financial hardships if some adverse events occur. It is not meant for education savings, retirement savings, or to receive tax exemptions. They are only incidental benefits; the main thing is covering the risk of your absence.

In their bid to get something out of the money given to the insurance company, investors often opt for insurance policies that give ‘something back’, especially regarding life insurance. This is the time when customers lose sight and confuse insurance with investment.

Investment-linked insurance products aren’t meant for everyone.  If you expect high real returns, the kind of returns you can earn from a well-managed mutual fund portfolio, you should not opt for insurance products. You not only end up with low returns but are also left under-insured by a considerable margin.

Don’t Deny The Risks; If Feasible, Don’t Retain Risks

Studies say that rather than buying required risk cover, people generally tend to be in denial mode about the existence of risks and how they should address them. 

Whether you like it or not, you will face emergencies or unanticipated adverse events in your life.  The statistics are against you.

By buying an insurance cover, you can transfer the risk of financial losses, to another entity called the insurer, in exchange for a payment – insurance premium. Such a risk transfer ensures financial protection or reimbursement against covered losses from an insurance company.

After deciding on optimal risk retention and transfer levels, you need to determine what risk transfer methods or a combination of them would be used to help optimise the total costs of insurance risk management.

Buy Risk Cover Before Negative Events, Not After

Insurance is a form of risk management used to hedge against a contingent, uncertain loss risk. When adverse events are known, it is no longer a transferable risk. Buyers of risks can’t be fooled to take over losses of a known adverse event. For example, Insurance is not for the person who passes away but for those who survive. In another example, we can also see that one cannot buy health insurance while getting admitted to a hospital.

The ability to identify risks earlier has other advantages as well. It translates into earlier risk removal, which comes at less cost and promotes a more hassle-free life.

Disclose All Relevant Facts When Buying Insurance

All parties to an insurance contract are under a strict duty of disclosure to act in the utmost good faith. So, to have a valid contract agreement with the insurer, you must comply with all the obligations Insurance Law places on you as an insured. In very general terms, Insurance Law requires you to disclose all relevant material to the best of your knowledge in the form provided when buying the insurance policy.

According to data, some claims are not honoured as policyholders failed to disclose all relevant details. If you follow the process and disclose fully, it will reduce any chances of claims being denied. It is always better to pay an additional premium for a small existing problem rather than facing issues with claims on the ground that the facts were not fully disclosed.

This disclosure may be necessary to give you the peace of mind you seek through insurance, as it puts you on the safe side.

Understand Your Policy, Know Your Insurer

“Education is when you read the fine print; experience is what you get when you don’t.”

Several kinds of research show that people generally get driven by price alone while buying an insurance policy and eventually choose a cheap-as-chips policy that covers very little. For example, you may find the cheapest travel insurance policy that does not cover lost luggage or missed departures. So, the first thing you should do is select a policy that provides the cover you need.

Before settling for any insurance company, it is better to check the report from the regulator that regulates and keeps track of the insurance industry. In our case, it is Insurance Regulatory & Development Authority (IRDA).

It would help if you also went for a background analysis of the insurer and checked facts such as corporate reports, customer acquisition and retention ratio, the number of policyholders, profit ratios and other information as accurately as possible. On more occasions, instinct and thorough research are your best guards and weapons.

One of the most common reasons insurance claims are rejected is because the policyholders overlook the small prints and fail to read the policy conditions. Such situations lead to misunderstanding an insurance contract’s scope, benefits, limitations, and capabilities. It is always advisable to carefully read the policy document and all fine prints to ensure you will not misunderstand. Mis-buying an insurance policy is more frequent than someone mis-selling you. Mis-buying happens because you overlook the terms and conditions and don’t ask the right questions before signing up.

You Can’t Cover All Risks Through Insurance.

While insurance is an excellent tool for transferring risks, you should also understand that it is designed to protect you from insurable risks and not uninsurable risks. If there is no economic loss or you can afford to absorb that loss yourself, there is no need for insurance.

The size of the loss must be meaningful from the insured’s perspective. Along with the expected cost of losses, insurance premiums must cover many other costs, such as issuing and administering the policy, adjusting losses, sales and marketing expenses, agency commission, etc. These latter costs may be several times the size of the expected losses for small losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer.

There are also situations when the risk is worth taking rather than paying a premium to transfer it. In such times, you can bear a few minor losses or damages without any financial hardship just by maintaining an emergency fund.

Some risks may be influenced by one’s actions and therefore uninsurable such as job loss. So, buying insurance as the sole option for risk reduction is neither necessary nor feasible.

Review Your Insurance Needs Regularly

The amount of insurance you need may change over time as your circumstances, income, assets, and liabilities change. For most people, it seems to decline over time, as obligations to family change and your financial net worth grows. So, it is always good to review your insurance requirements regularly.

With many new players coming into the business of taking over the risks and selling insurance policies, product innovation is constantly happening.  Also, the regulator takes periodic actions to reduce the costs and increase the benefits.

Moreover, need analysis and reviews are necessary when special events take place.

It would be best if you also made enough provisions for flexibility while getting into any insurance contract. Rather than opting for one comprehensive life insurance policy, you should spread across many insurance policies of smaller amounts and have the flexibility to discontinue one of the policies while continuing with the rest.  For the same reason, don’t tie your investment objectives to your insurance needs.  Your insurance needs may reduce, but your need to constantly increase your wealth would hold always.

Important Disclaimer:

The products mentioned in this document may not be suitable for all recipients, and you should seek professional advice if you are in any doubt. This document does not constitute a prospectus, offer, invitation or solicitation to buy or sell securities. It is not intended to provide the sole basis for any evaluation of the securities or any other instrument or services that may be discussed. This document is not a personal recommendation. It would help if you considered whether you could rely upon any opinion or statement in this document without seeking further advice tailored to your circumstances.

This report is prepared for general information and education, not a business solicitation.