When to review your cover

Revising your insurance cover is important to remain financially secure.

Sanjeev Sinha        Print Edition: September 6, 2007

It’s a case of well begun, but half undone. Life insurance is one financial instrument most Indians buy, and buy early on in their life. Usually people insure themselves much before they consider investing in mutual funds, stocks or any other form of investment.

That’s exactly how it should be. As TS Vijayan, chairman, Life Insurance Corporation says, life insurance is the first among all forms of savings. But having started early, most people don’t follow-up on the adequacy or appropriateness of their insurance policy. They would review and evaluate performance of how their investments in fund or stock or even fixed deposits is doing, but they seldom evaluate if their insurance cover needs to be revised.

Says Pier-Paolo Dipaola, deputy CEO, SBI Life Insurance, “Most often at the time of buying life insurance, individuals err by insuring either too little or too much. Some individuals who insure themselves for a small amount are vulnerable to unbearable financial loss at the time of an unfortunate event.” Most Indians are underinsured.

The reason is simple. Their first policies were brought primarily as tax saving investment early on in their careers. As they move up in life—personal and professional— their cost of living rises. But the life insurance cover is not proportionally enhanced.

The optimum cover value changes over time and it needs to be reviewed at 4-5 important stages in life to ensure that it’s sufficient for the rising needs of your dependents in case something untoward happens to the person insured. There are other factors to keep in mind while reviewing the covers -- premium paying ability of the person, his age and the tenure and kind of policy already taken. There is no onesize-fits-all insurance policy (read “How Much Insurance Do You Need”, MONEY TODAY, dated 2 November, also available at www.moneytoday. in).

However much you think through before taking your first policy, you still will have to review its adequacy. For just as financial needs keep changing, so would be insurance needs. MONEY TODAY identifies four specific stages in life at which the insurance cover needs to be thought of all over again and readjusted:

Marriage Multiplier:

For 35-year-old Sanjeev Kesar, life insurance needs were limited so long as he was a bachelor. “When I got married, I realised the addition of responsibility—both financial and emotional,” says the Delhi-based readymade garment distributor.

The first trigger to reassess your insurance needs is when you add financial dependents. Most often this sets in the moment you get married, and as most financial experts say that is a stage when you need to start saving more as well. In case your wife contributes financially to the family income, re-assess her insurance as well and realign it to your combined needs. The logic is simple.

Life insurance is cover against sudden disruption in family income. If income is coming from more than one source, cover should be taken for all of them. Says Vivek Khanna, director-marketing, Aviva India; “Insurance is a hedge to provide dependents with a financial cushion; it’s advisable to add a policy at variuous stages in life.”

Baby Talk:

This one may seem a little more obvious, but in the excitement of planning your nursery or picking baby names, you may forget to adjust your life insurance to your new needs. In addition to other important forms of insurance, such as health insurance, it is important to ensure that you will be able to take care of your child’s financial needs. If your spouse were to pass away, would you be able to provide for your child’s many needs? Or, if you were a stay-athome parent and the major breadwinner of the household passes away, how would manage?

Says communications professional Anil Nagwani, 32, “I was aware that I was under-insured, so I scaled it up when my son was born a year ago.” There are parents who end up buying numerous insurance policies for their children, realising little about its rationale or benefits.

Firstly, the policy does not cover the life of the child. And if you are saving for the child, there are better options to explore. Often such policies are bought without people realising the purpose of what they are insuring and for whom.

New Milestones:

There are many factors that contribute to your life insurance costs. Some of them relate to poor health, obesity, smoking, others to occupations and lifestyles. If any of these change during your life, you should reexamine your life insurance policy.

For instance, if you were a pilot (or scuba instructor or mountaineer) but have changed professions to something considered safer, your life insurance rates will likely be lower now. Similarly, if you have lost a significant amount of weight or quit smoking, your premium rates are likely to go down.

Another occupational change that could affect your life insurance is if you begin working for yourself, as Nagwani discovered. This is an insurance need that many forget, especially those who enjoyed coverage through the employer they no longer have. Your start-up could also mean increased financial risk.

Covering all bases:

In the times when life on credit is becoming more and more acceptable, having an insurance to cover against all outstanding loans is essential. Without the support of insurance the biggest benefit of loans (afford today what you could not have afforded for years) is lost, in case something happens to the earning member of the family.

The biggest of all loans — a home loan — should be the first and foremost to be covered. Opt for either an insurance cover that piggybacks on the home loan or take a standard cover that over arches the loan value and tenure. These can be short-term in nature, as one may foreclose a home loan, but it should adequately cover the loan value.

Remember, the house is an asset for your dependents only if it belongs to them and the home loan is repaid fully. The whole idea of life insurance at this stage of life is to pay off your debts and support your dependents by replacing some, or all, of your income in case of your death.

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