A portfolio review often refers to reviewing of one’s asset allocation and striking the balance between equity and debt, depending on the risk appetite. But what is more essential is to review your insurance portfolio. If you thought that you have bought insurance and now there is no need to look at it for the next 20 year, then think again. Unlike investment planning, in insurance, if there is any mishap, the family has to go through a lot of financial and emotional loss, which is not easily rectifiable.
There are four instances and whenever these happen, a person needs to sit back and think about reviewing his insurance portfolio.
Increase in assets
As a person grows in age and position, he accumulates more wealth. A 25-year old professional, who has just started working, would have accumulated considerably less wealth as compared to when he is 40.
At both the stages his insurance needs would be different, as his family will have more wealth in case of his death. It is important to note here that assets do not include the house that is used as primary residence. Assets maybe used in case of a mishap to financially support the family. Thus if the asset size increases considerably, the need of insurance becomes lower.
Increase in liabilities/ loans
This is the most critical point when a review should be done. A loan should never be taken without a life cover.
Suppose a person has taken a home loan worth Rs 20 lakhs. In case of a mishap, the family of the person will have an additional burden of the home loan with the load of maintaining the expenses of the family. And at a time when the family is going through a phase of emotional loss, this kind of financial loss can be a severe blow. So it is essential for everyone to take loan cover for every loan taken.
Increase in earnings
Any increase in earnings is correlated to increase in spending, even if not in the same proportion as the increase in earnings.
An increase in earnings means a better standard of living. Any previous insurance taken before the increase in earnings would bring the family to the old standard of living. This means the family has to compromise, which is not the motive of buying insurance. If the family needs to enjoy the current standard of living then the insurance portfolio must be reviewed accordingly.
Increase in inflation rate
Whenever one sits to review his insurance portfolio, he needs to take inflation into account.
Hundred rupees in pocket today will not be the same five years from now. If we consider inflation at 6 per cent then the value of Rs 100 today will be equal to Rs 94.34 five years from now. In case the inflation rate starts to increase or decrease at a fast pace, which doesn’t happen very often but is not a very rare phenomenon, then one should review his insurance portfolio. The sum assured may not be enough for the family of the insured to cover all financial aspects.
Considering these situations, an ideal time to review the insurance portfolio is once in every three years.
Along with that, one should choose the product to cover oneself also very carefully as wrong product may not solve the purpose of insurance planning.
(The author is research analyst for Apnaloan.com)