by Mr. Suresh
Sadagopan, Ladder7 Financial Advisories.
Remember that
insurance is for protection. If that is understood, one will never go wrong
Insurance is an area
that cries for attention in people’s financial portfolios.
As planners, we dread
the prospect for the most part for there is a thicket of policies that needs to
be gone through.
We, as planners,
generally examine these and validate the need for keeping these policies in the
portfolio.
On an average, a
client will have nearly a dozen policies. And usually, these will be endowment
policies, money back policies, unit-linked insurance plans (ULIPs), and
occasionally, the term policy.
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| Mr. Suresh Sadagopan, Ladder7 Financial Advisories |
Very few people have
actually made the effort to find out whether the policy chosen is suitable for
their requirement, what the policy benefits are, it’s costs and so on.
What usually happens
is that the distributor would have asked them to go for the policy & they
purchased it for the amount of premium they felt comfortable with.
Nothing was ever
discussed about how much was really required for education or / which vocation the child might choose. The
only thing discussed was how much the client can spare for the premium.
Myth about
traditional policies..!
The media onslaught
on ULIPs has had one positive & one negative after effect. The positive
development is that due to the heat that was turned on ULIP, charges have come
down drastically.
The fallout, however,
is that the perception now is, ULIPs are very costly and unsuitable products.
Even today, consumers
and even those from the financial services industry believe that. This has
created an opportunity for buccaneers in the financial services industry to
push traditional products, whose structures are opaque.
Traditional insurance
policies take as much as 100% of the first-year premium towards charges (which
we can gather from the fact that the first-year premium is not taken while
calculation of surrender charges).
However, taking
advantage of the flawed perception, distributors push traditional insurance
policies. Reviewing policies Insurance is about providing security.
Hence, a simple term
insurance is an effective low-cost solution. How does one decide what to do
with the forest of policies accumulated over time?
Here is what one
could do.
First, you should
check if the policies are still relevant.
Insurance policies
with sum assured of something like Rs.2 lakh or / Rs.3 lakh may not be relevant
in current circumstances - the amount is simply too small to matter.
It would be advisable
to make these policies paid-up or better yet, surrender them.
The second check is
whether the policy can even remotely meet the intended goal?
In most cases, it
will not be able to, as the policy was not given due consideration at the time
of purchase.
The third check is if
the insurance premium payments are affecting achievement of one’s goals.
In many cases, they
are. And in some cases, so much money has gone into insurance that all savings
are through insurance alone. In such cases, surgery is in order.
Many insurance
policies that are directly affecting cash flows would need to be surrendered
and others, which can not be surrendered for some reason, can be made paid-up.
With some types of
policies, one may need to either partially withdraw or / take loans to make things work.
The fourth check is
to see how to simplify the portfolio itself.
An unwieldy portfolio
of, say, 15 to 18 policies, is difficult to manage, even if it does not
suffocate the cash flows. At least there is no real problem here. It is a good
idea to simply weed out the small, unwanted policies, even though one has to
take a hit in the form of losing out on the money paid as premiums.
The fifth check is to
see if the ongoing charges are high and if by keeping the policy, one will end
up with a measly return.
If true, then it is a
case for surrendering & investing elsewhere.
The sixth, and final,
check is to find out if the policies give the basic yield that a debt product
gives on a post-tax basis.
For instance, if a traditional
policy is offering 5.5% to 6% returns, it would roughly be equivalent to what
one would get from a fixed deposit or post office investment, on a post-tax
basis.
If debt allocations
are required in the whole portfolio, some of the insurance policies can be
allowed to stay as part of overall debt allocation. One needs to clearly
understand that while surrendering, there will mostly be a loss on even the
premiums paid. All due considerations outlined above have to be taken into
account before arriving at a decision.
Insurance portfolio
has to be managed well. It grows like weeds because most people keep buying
policies that they do not need. The problem is compounded when a friend or
relative is selling the policy. The portfolio has to be pruned and maintained,
much like a garden. Remember that insurance is for protection. If that is
understood, one will never go wrong.
About the author
Mr. Suresh Sadagopan is Founder at Ladder7 Financial Advisories.
Mr. Suresh Sadagopan is the Founder of Ladder7 Financial Advisories, a specialist Financial Planning / advisory company. Ladder7 was founded by him in 2004 and has since been in the field of detailed and holistic financial planning. He is on the board of directors of FPSB India for the period between 2013 -15. He has been in several committees of FPSBI, over the years.
He contributes regularly in various publications on Finance & related subjects. He has written hundreds of articles on various aspects of Finance &related subjects for reputed publications such as The Times of India, Business Standard, The Economic Times, Money Today, Outlook Money, India Today, Moneycontrol.com, DNA Money, Financial Planning Journal, etc.
He also blogs on FinancialPlanet.org, the international blog of FPSB US. His blog was one of the Top 10 blogs of 2012.
He has participated in many shows on NDTV Profit, CNBC Awaaz, CNBC TV18 & DD News. He was also on the expert panel of FPSBI on "Gold as an asset class", participated in many panel discussions by DNA & Money Today. Participates regularly in lectures, panel discussions etc. on personal finance subject in various fora.
Mr. Suresh Sadagopan has also conducted corporate training programs on Financial Planning for senior personnel in financial services field and has conducted sessions for seminars organised by FPSB, India for CFP Certificants and other organisations.
He is currently President of The Financial Planners' Guild, India. For the Guild, he has conducted public programs in Mumbai & New Delhi for Financial Planners. He has taught in the past on Financial Planning subjects, for candidates pursuing CFPCM
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