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Is it time to review your insurance portfolio?

Last updated on: May 11, 2009 10:50 IST
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A stock portfolio review is reviewing your asset allocation and striking the right balance between equity and debt depending on our risk appetite.

Though reviewing your stock portfolio is important 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 your family has to go through a lot of financial and emotional loss that is not easily remedied.

Hence it is very important that you review your insurance portfolio periodically. Here are four scenarios that will help you assess as to when to review your life insurance portfolio.

1. Increase in assets

If and when your assets increase, ideally, you should decrease your life insurance.

As you grow in age and position, you accumulate more and more wealth.

As a young professional aged 22 who has just started working you will have accumulated considerably less wealth as compared to when you would hit 50. At both stages, your insurance needs would differ.

At 50 you would have earned enough to support your family and dependants and hence your family is wealthier than it was when you were just starting out at 2w.

Thus if asset size increases along with your age, 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 sold and proceeds from this sale could be used in case of any mishap to support the family financially.

2. Increase in liabilities

This event should lead to an increase in life insurance.

This is the most critical point when a review should be done. Do not take out any loan without a life insurance cover.

Suppose you take a home loan to buy a new Rs 20 lakh house. If you were to pass away 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.

3. Increase in earnings

This should lead to an increase in life insurance.

Any increase in earnings is directly co-related to increase in spending even if not in the same proportion of the increase in earnings.

An increase in earnings means a better standard of living. Any previous insurance taken before this increase in earnings will then bring the family only to the old, lesser standard of living.

This means the family has to compromise its standard of living, which, in the first place, is not the motivation behind buying life insurance. So, if your family needs to enjoy the current standard of living, the life insurance cover must be increased when earnings increase.

4. Increase in inflation rate

If the rate at which prices of foodgrains and essential commodities increase then you should increase your life insurance.

Whenever you sit to review your insurance portfolio you need to take inflation into account.

Rs 100 in your pocket today will not be of the same value five years hence. If we consider an annual inflation rate of 6 per cent, 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 , while it does not happen very often, is not too rare a phenomenon), you should review your insurance portfolio. The sum you were assured of five years ago may not be enough for your family today to cover all your 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.

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