• Insights

Financial planning is as much about securing whatever we create in our pursuit of achieving financial goals as it is, in the first place, about wealth creation. We employ a lot of our time and energy and incur a certain cost in converting our precious resources into a variety of assets, which are either consumed in our day-to-day life or set aside for future use, including bequeathing. Life is the most precious asset and it would not be appropriate to ascribe a value to it. It is not recoverable. However, in insuring our life, we aim to provide for the replacement of a likely value which we would be able to generate in our remaining lifetime for the use of our dependents, including their major financial goals.

The non-life insurance, on the other hand, helps us in avoiding a likely loss in the value of our assets due to the occurrence of a possible event such as fire, earthquake, flood, lightning, breakdown, etc. Thus, non-life insurance is an essential part of financial planning which helps us in keeping peaceful possession of our assets in a way that we provide for restoration to their current status in case of loss or damage due to unpredictable events.

Contingency planning, therefore, is an important aspect of financial planning which requires a systematic approach to identify contingency events and articulate appropriate responses and strategies to cope up with them. A planner has to anticipate contingencies in relation to the client’s situation and identify low probability events that would have catastrophic impact on the finances of the client in the restoration of asset to the pre-event status. At the same time, a fine balance has to be struck in choosing the events to be offset, as developing a plan for every possible contingency would be a terrible draw on the resources with low overall beneficial impact. Therefore, a careful analysis should be made of events that would cause the greatest disruption of current activities and plans, and the erosion in value if they happen.

There are few mandatory covers such as motor insurance and liability insurance. However, optional or non-mandatory insurance such as fire, burglary, accident, critical diseases, disability and hospitalization can cause serious disruption to finances.

An important offshoot is the accident and health insurance which helps in recovering hospitalization and incidental costs incurred in curing diseases and temporary disablement. To retain good health of the self and the members of family is foremost on the agenda of an individual. Sudden illness or accident of households, if not covered by way of health insurance, may require liquidation of financial and other assets reserved for long-term goals. Moreover, health insurance enables an individual to seek best medical services without worrying over the finances required. There are tax benefits available in terms of deduction from total income under Section 80D of Income-tax Act, 1961 for premium paid up to Rs.15,000 in a financial year for self, spouse and dependent children, all under 65 years of age, or else Rs.20,000. Additionally, premium paid up to Rs.15,000 is deductible for health insurance of parents, the limit extended up to Rs.20,000 if either of the parents is a senior citizen.

The Insurance Information Bureau data show higher growth of individuals covered under health insurance than the policies taken. This indicates growing awareness of health of all members of the family. The growth in the premium collected as well as claims disbursed underlines the reality of medical insurance. The changing lifestyle and increasing work pressure make it necessary for a bread winner to maintain as well as secure his health against any untoward diseases, critical illness and disability.

The critical evaluation of the factors relevant to a household and taking appropriate cover keeping in view the technical aspects such as principle of indemnity, subrogation, insurance interest is the domain of a qualified professional such as certified financial planning practitioner. Such professionals ensure that there is no under-insurance which may lead to non-obtaining of the market value, while over-insurance is useless leakage of revenue. As all financial sectors do, the non-life or general insurance also plays a significant role in the development of the national economy. It helps in speedy restoration of an asset due to a perilous event with institutional assistance. It pools the risks and resources from players who have insurable interest in the assets insured. This enables business environment with the management of risk factors not related to business.

The general insurance industry earned a net premium income of over Rs.26,000 crore in 2009-2010. The strength of the industry shields the state from obligation of recompensing losses and the economy is shielded from risks of depletion of public and private assets.

RANJEET S. MUDHOLKAR is working with Financial Planning Standards Board India (FPSB India) in the capacity of Vice Chairman and CEO. The views expressed here are personal, and do not necessarily represent that of the organization. FPSB India is the sole marks licensing authority for the CFP marks in India, through agreement with U.S.-based FPSB Ltd.

RANJEET S. MUDHOLKAR is working with Financial Planning Standards Board India (FPSB India) in the capacity of Vice Chairman and CEO. The views expressed here are personal, and do not necessarily represent that of the organization. FPSB India is the sole marks licensing authority for the CFP marks in India, through agreement with U.S.-based FPSB Ltd.

©Entrepreneur September 2011

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business, cover, Financial Planning, health, insurance, Mudholkar, non life insurance, Ranjeet, Ranjeet S. Mudholkar