The need-analysis format should be convenient to use for the intermediaries for it to be successfully implemented. ICICI Prudential Life Insurance MD & CEO Sandeep Bakshi says the proposed format is difficult to implement in its present form and needs modification.
Similarly, Star Union Daichi Life Insurance MD & CEO Kamaljit Sahay says the implementation of the proposed format will affect business growth as independent advisors (IAs) will find it difficult to comply with.
The challenges from the customers side are similar to those faced by financial planners, that is, first, convincing the prospects that it will benefit them and, second, to get correct and complete data. Because any incorrect information on income, expenses and assets will lead to inaccurate assessments on the required insurance cover, which will defeat the very purpose of the exercise.
The proposal form is the basis of the insurance contract. The current proposal forms being used by the life insurance companies include the proposers medical history and the family medical history. So, it will be convenient if the current proposal forms are continued, but supplemented by a simpler need-analysis format. The need analysis can be scrutinised during financial underwriting.
How much insurance cover
There are two ways to estimate the required insurance cover. Under the need-analysis approach, the present value of the future expenses and current liabilities are aggregated from which the available financial assets and existing life insurance covers are reduced to arrive at the required additional insurance cover. The future expenses will include the present value of childrens educational and marriage expenses and the corpus required to take care of the familys day-to-day expenses to maintain the current standard of living. The liabilities are primarily home loan, car loan and personal loan.
But at an early life stage, the proposer may not have a family or dependents. The dependents and liabilities increase with life stages and, hence, the need for life insurance increases. Further, mortality charges increase with age; so, deferring life insurance becomes costly. It is, therefore, advisable to start life insurance at an early life stage. The Human Life Value (HLV) method, rather than need analysis, will be more appropriate in this situation to arrive at the required insurance cover. In HLV, the present value of the future income of the proposer is taken as HLV. From the HLV, the current insurance cover can be reduced to arrive at the required additional cover.
Life stage and needs
Needs undergo change with change in life stage. The proposed product matrix envisages five stages, i.e., unmarried, married, married with children, pre-retirement and post-retirement. The protection need increases with the addition of family members and liabilities and, then, decreases once dependents become independent and loans are closed. The need for savings and investment are related to the achievement of various financial goals. The need for annuity/regular income arises after retirement. The need for health cover increases with advancing age.
Once the required additional insurance cover is determined, then follows products recommendation. The first step is to have a look at the affordable contribution. Protection need has priority over savings and investments. If the affordable annual contribution is just sufficient for term insurance premium, the prospect should be sold that. If there is surplus, then medium-term goals like childrens education, etc., can be focused by appropriate endowment/Ulip products. In case of long-term goals, say, of more than 10 years,Ulip products can be recommended. But prospects must be explained the implications of market risk. Ulips should not be sold for short-term goals as the prospects could be trapped in market downturn.
Similarly, for long-term goals, regular premium is always preferable over single premium from the market-volatility angle. If the prospects have received one-time payment, say, bonus or retirement benefits, single-premium products can be appropriate. It has to be ensured that the maturity proceeds of savings and investment products sold to the customer are adequate to meet the goals for which the product has been sold. In case surplus is still available, then this can be deployed for wealth maximisation. The healthcare need can be taken care of by fixed benefit plans, which can be in addition to the reimbursement plans of the general insurance companies.
ICICI Prudential Life Insurance MD&CEO Sandeep Bakshi says the need analysis is just one part. For increasing insurance penetration, there is a need to design simpler products, which can be sold through the bank branches spread across the country. It will result in reduction of the distribution cost, which can be passed on to the consumers. Kamaljit Sahay says the banks staff do not have time to explain the product features to the customers. In this situation, pre-underwritten insurance products can be sold, which will make it possible to cover a large number of bank branches.
The writer is chief financial planner, Max Secure Financial Planners