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Published in Mint, written on 30th March
Panellists discussed the roles of health, life, vehicle and home insurance in managing our money box. Participating in the discussion were: Kapil Mehta, co-founder, SecureNow Insurance Broker Pvt. Ltd; K.S. Gopalakrishnan, managing director and chief executive officer, Aegon Life Insurance Co. Ltd; K.V. Dipu, president and head of operations, Bajaj Allianz General Insurance Co. Ltd; Mahavir Chopra, director-health, life and strategic initiatives,; and Priya Sunder, director, PeakAlpha Investment Services Pvt. Ltd.
The panel was moderated by Deepti Bhaskaran, editor-insurance, Mint Money.
Deepti Bhaskaran: As the new financial year starts, let’s try and understand an average person’s approach to insurance and some smart strategies to use for insurance needs.
Priya Sunder: Insurance is not a pull product, it is a push product. People have to be told they need insurance. There are various ways to look at this. One easy way is to ask if I die tomorrow, what are the future cash flows and income streams and their growth rate. Risk management is a basic block of financial planning. You can’t plan for the upside without planning for the downside.
We review our clients’ needs every 3 months. But insurance is an expense, so it’s a good thing to self-insure to an extent, such as through an emergency fund. Insurance is about a high-impact low-probability events in the future. So, self-insurance doesn’t work there.
Kapil Mehta: I have been in the insurance industry, mostly distribution, for about 13 years now. People tend to view insurance in a short-term manner. They buy it when they need it. Of about 100 applications for health insurance, only 60 go through and 40 are rejected because those people already had ill health. That has to change.
K.S. Gopalakrishnan: Insurance is not something people actually want to think about. In general insurance, people mostly care about motor insurance; home insurance is something that is not talked about.
K.V. Dipu: In a survey, we found that most ‘prospects’ feel this is not going to happen to me. A study by an academician also found that people think: what has to happen will happen. That’s the typical mindset.
The other aspect is that they don’t view the entire buying process as fun. You avoid thinking about insurance because it is something that is invoked at bad times. So, we need to create that need, which is why it is a push product; and we have to make the buying process more fun.
Mahavir Chopra: We are a religious country; we feel God will take care of us. When we buy a car, we don’t look at airbag first, but an idol. Also, because of our joint-family base, where there is some buffer, people don’t understand risk the way it should be. Of the entire insurance pie, those who voluntarily buy insurance are very few.
Bhaskaran: In terms of products, even in term insurance, there are various types. Is there a strategy to follow in term plans as well?
Gopalakrishnan: People take it as a given that they will survive the term (of the policy). So, a lot of awareness has to be created about term plans. For life insurance, buy a term plan first and then anything else. In situations where the claimant is not financially literate, it may be better to have a regular income product until the family finds a replacement for the income that was lost. Mostly, there are three choices: lump sum, regular income or a combination of these two. Beyond that are various variants as you don’t want to compete just on price all the time. But these complicate the segment.
Chopra: There is a lot of inertia among customers. We approach it in two ways. One, I try to know what his concerns are, how he looks at them, and then choose a product.
The other way is to try and make it simple—tell him that you solve one large problem; that you get a big lump sum. We have tested both with customers and found that when we kept it simple, most customers bought it. This is not from a sales point of view. When we talked of riders, most people didn’t understand them. People have a negative view of insurance and in that if we talk of multiple features, it doesn’t solve the large problem. So, we suggest that the customer look at other products to solve other problems.
Bhaskaran: Are there any merits in bundled plans (plans that offer both insurance and investment)?
Mehta: There are two issues in bundling: one is transparency and the other is flexibility. When you split this into two products, you get term—which is comparable and competitive—and then a variety of products for investment. If you buy a bundled product, getting out is difficult and charges are very high. In term, it is simple. In this case, it is better to disaggregate.
Sunder: We look at life insurance not as a lifelong thing but as a stop-gap measure. You are at a certain point in life and you need to get to a place when you retire; what is that corpus you need and what is the gap? Term plans also have to be reviewed because that person may need a different level of cover 5 years later. We don’t like to attach riders because, say, you can be exposed to a critical illness anytime during the rest of your life but you may have a need for the term plan for much lesser period.
We can’t see everything in terms of returns. Plus, sometimes a combination of a term plan and mutual funds turns out to be more expensive than a Ulip. In a Ulip, the mortality cost increases over the years but in a term plan it stays the same, which means the cost is front loaded. Also, term plans need premiums to be paid regularly, else it lapses. In Ulips, there is some form of continuity. Moreover, in children’s plans, if you are not there, the insurer will pay the premium, thereby ensuring that the goal is not compromised.
Bhaskaran: Health insurance also has various products. What is a smart strategy here?
Dipu: A smart strategy for a family of four would be to have a family floater policy. They could take a personal accident cover, a loan protection cover, and a critical illness cover. There are various independent sites where people can cut through the clutter and just pick these three or four covers. List down your needs and just pick those products.
Chopra: We look at managing the risk between all the family members—whether to go for a full floater, or individual cover for some of the members. And then go for a super top-up plan. I would not recommend a hospital cash plan as it is a low priority. But critical illness is very important.
Mehta: My view is that one should stay focussed on a very basic mediclaim plan. Get the sum assured right, and make a sensible product choice. We underestimate the cost that will be there later. So I would say, put all your money in buying a high sum assured. And pick any structure in which every member gets that high sum assured. For products, choose something that has a low waiting period for pre-existing diseases, and don’t have caps. And make sure you renew on time.