Protection and investment are not independent needs, closely intertwined

Credible research studies show that the key drivers of investment are financial protection for one's family and wealth accumulation for the future. There is also a view that one's investments and protection are different needs and hence should not be clubbed together. Many simplistically assume that one's protection needs should be met by insurance products whereas investment products such as mutual funds, bonds term deposits etc. are best suited to meet wealth accumulation needs.This philosophy does merit a debate. We must understand the fact that protection and investment are not independent needs, but are in fact, closely intertwined.

The earning members in an Indian middle-class household often do not have sufficient wealth in the early stages of their careers to enable them to achieve certain defined life goals such as buying a house, paying for higher education or saving for one's retirement. They aspire to accumulate this wealth through the course of their active working lives. Since meeting such defined goals is dependent on one's future earnings, it is imperative to safeguard those earnings against any eventuality; hence the emphasis on the importance of protection tools and their inter-relation with investment products.
 

Insurance is one such financial tool that helps protect your family's future earnings while investing for your defined financial goals. In recent times, we are faced with the risk of either dying too soon or living too long and this risk will only increase in the future. In both these scenarios, having a balanced insurance portfolio composed of pure protection plans, saving plans and health insurance plans will safeguard one's family's financial future. A simple thumb rule of investing 5% of the total household income or 25% of one's total savings in insurance will help build a prudent insurance portfolio. Pure protection plans help mitigate the risk on one's future earnings in case of an early death. On the savings side, traditional life insurance products are amongst the only instruments available in the market that provides long-term guarantees to customers. These guaranteed returns, spread over a long term help protect consumers from fluctuating interest rates and volatile equity markets unlike other asset classes in the market. Pure protection against future risk coupled with life-stage protection through guaranteed returns, make life insurance a very compelling proposition to consider.

While building one's insurance portfolio, one must also consider the risks of illnesses that may occur and hamper future earnings. It is important that the appropriate insurance products are chosen to offset this threat.

Three classes of health plans should be considered to safeguard oneself against any medical expenses that may crop up. The first two are reimbursement products and fixed-benefit products. These two complementary product classes cover hospitalization expenses and offer fixed benefits that cover any other incidental expenses that may arise during an illness, respectively. Though these products will help shield one against medical and incidental expenses in case of a hospitalization, they will not provide for the potential loss of income that could stem from a critical illness. It is also important to have a critical illness health plan that provides one with a lump sum amount on diagnosis of any ailment that falls within this category.

While the ideal situation would be to protect oneself from all uncertainties, one must also take into consideration the financial impact that ensues. Prioritization is the keyword while choosing life insurance solutions and one should always cover the most imminent risks first. A well-structured insurance portfolio not can only providefor one's needs at key life stages, but also help plan for a brighter tomorrow, today.

The author is CEO, Bharti AXA Life Insurance