Right time to review your life insurance portfolioWant to know what's the right time to review your life insurance portfolio? Here's when.
Abhishek Kumar Singh
04 Dec 2008
Right time to review your life insurance portfolio
A portfolio review is reviewing your asset allocation and striking the right balance between equity and debt depending on your risk appetite. There is another more essential review - your life insurance portfolio. If you think you have bought life insurance and now there is no need to look at it for the next twenty years, think again. Unlike investment planning, in insurance a mishap means the family has to go through a lot of financial and emotional loss that is not easily remedied.
There are four scenarios, and in each of these, you need to review your life insurance portfolio.
A. Increase in assets - should lead to a decrease in life insurance
As you grow in age and position, you accumulate more and more wealth. As a young professional aged 25 who has just started working you will have accumulated considerably less wealth as compared to when you hit 50. At both stages, your insurance needs would differ i.e., your passing away nearer 50 means that your family is wealthier that it was when you were just starting out at 25. Thus if asset size increases, the need of insurance becomes lower. It is very important to note here that a house that is used as a primary residence does not count as an asset or wealth. Assets are those that may be used in case of any mishap to support the family financially.
B. Increase in liabilities (such as loans, borrowings) - should lead to an increase in insurance
This is the most critical point when a review should be done. Do not take out any loan without a life cover. Suppose you take a home loan to buy a new Rs. 20 lakh house. If you were to pass on as a result of an unfortunate accident, your family will have an additional burden of the home loan; along with the load of maintaining the expenses of the family. And at a time when the family is going through severe emotional loss, this kind of financial loss can be a severe blow.
C. Increase in earnings - should lead to a increase in insurance
Any increase in earnings is directly correlated to increase in spending even if not in the same proportion of the earnings increase. An increase in earnings means a better standard of living. Any previous insurance taken before the increase in earnings will then bring the family to the old standard of living. This means the family has to compromise its standard of living, which is not the motivation behind buying insurance in the first place. If your family needs to enjoy the current standard of living, the life insurance cover must be increased when earnings increase.
D. Increase in inflation rate - should lead to increase in insurance
Whenever you sit to review your insurance portfolio you need to take inflation into account. A hundred rupees in your pocket today will not be of the value same five years hence. If we consider inflation at 6 %, the value of Rs. 100 today will be equal to Rs. 94.34 five years from now. If inflation were to increase or decrease rapidly (which does not happen very often; neither is it a very rare phenomenon), you should review your insurance portfolio. The sum you assured for five years ago may not be enough for your family today to cover all financial obligations and requirements.
Taking all of the above probable scenarios into account, an appropriate
time to review your life insurance portfolio is once every three years.