Co-Creating the Life Insurance Plan

 Co-Creating the Life Insurance Plan

R.GOPINATH

gopinathr@go-past.com

In the last issue of inscriptions under the title of “Financial priorities pyramid- Pole star” we saw that “When we are dealing with a resource, that is available in limited quantity, the first thing to do is to prioritise its usage. That is how we can manage tangible resources like Electricity, Water, Battery power, Oxygen and even intangible resources like Time, Relationships, etc. We first list out the most important things to be achieved with these resources, and then we sequence them in order of their importance.

It is therefore Prudent to use the same strategy (Prioritise) when it comes to Finance. Most of the worries that men, women, families, institutions and even Governments are facing, have some root level connection to Finance (shortage). Finance is a limited resource. Even a person possessing Millions still has only so many millions”.

The first stage in the financial priorities pyramid is duties and responsibilities. So a person must first identify and quantify his duties and responsibilities and should provide for them first and then proceed to the second priority in the pyramid. But this is not a easy task, because of the emotional connect with the present days and requirements. 

Consider the following 3 Scenarios:

1) When people get money to spend on things, what will be their choice A) To spend it that they can feel happy now or B) To spend it on things that can give them happiness sometime in future (delayed gratification). They may like to spend money on a holiday trip this week end or on a dinner in a five star hotel celebrating the birthday of their child rather than buy a membership card that may give them a 80% off on a dinner two years from now.

2) When people buy products, what will be their first choice A) To buy products that will be useful now, or B) To buy products that will be useful a few years from now. Obviously A will be their choice. With the limited money that they can spare the majority will have the tendency to buy “A”. For example if a person buys a car, he will be able to use it from today. He buys a house, he will be able to stay in it from now onwards. He buys a mobile phone he will be able to use it straight away. 

This is not just for the first purchase, it is equally true for repeat purchases also. For example a person is having a good phone, but a latest version with a few additional facilities has come into the market now. Here also the person may be interested in replacing this old (not so old) phone with the latest one. 

3) When people buy products that will protect them from inconveniences or discomfort what will they prefer A) Protect them from events that can happen quite often or B) Protect them from events which are rare to happen. Obviously A will be their preference. For example rains are frequent and it disturbs their daily routine so umbrellas are bought. Cell phones can fall down often and the touch screen may crack, so buying a protective screen guard is a priority. The tyres of a car can get punctured, it can cause a severe disruption, therefore to get a spare wheel is a matter of priority 

But events like death, disability, critical illnesses are rare. It may happen once in a life time compared to the above mentioned events that can happen every year, or once in a month. Events like death, disability and critical illnesses don’t happen that frequently, even though we know that if it were to happen then it can cause a severe disruption much more than all the events mentioned above. 

It is not that people spend money extravagantly that they do not have enough to spare to buy adequate life insurance cover to provide for a dignified retired life. In fact they are mostly cautious in spending. The problem here is the availability of money to fund those future goals. 

When more money is available even a luxury product appears to be an essential buy for the extra benefits that come with it.  For example a person can with much difficulty spare ₹50,000 to buy a cellphone that too in instalments. The salesman shows him a high-end phone with face recognition, dictation, high clarity camera, and many other such advancements but the cost is ₹1,00,000. The buyer says, “For me, I need a phone with minimum facilities. I just want a simple camera. I can switch on my phone manually, I don’t need a face/audio starts and goes for the ₹50,000 phone feeling that the high end one is a luxury one and who will spend double the money for those small additional facilities. 

But if the same person were to have ₹1,00,000 to spare for the phone and the customer was shown both the high end and also the ₹50,000 one, then the buyer is likely to go for the ₹1,00,000 high end one justifying all those small additional facilities are needed for him. He will justify those facilities save time for him, and time is  money for him. It also saves efforts which he can now invest in other important tasks. 

When a Life Insurance advisor is visiting a prospect and initiates the sales discussions, look what happens most of the time. He is talking about a product that can save them from a hazard which is unlikely to happen, at least not immediately. He is talking about saving money for an event that is likely to happen a few decades (or years) from now. If they spare money for this plan then they will have to deprive themselves of some other purchases that can be useful immediately or the ones that can give happiness today. It is not that they are not aware about the value of insurance. By and large they agree, that everybody must be insured and everybody must save money for their better future and must spend less in the present days. But when it comes to taking action of buying and putting these insurance plans they have a different opinion. Let us do it later. Let us start with a small amount. 

Normally a salesman needs to do a great job of explaining the product features and the benefits it gives to the buyer. But Life insurance agents have one another important job to do, that is of helping the prospect to understand his need and the urgency to put a risk management solution in place. 

The agent must also be cautious about not creating an impression that the agent is assuming the role of a teacher. Normally adults don’t like to be taught, but they like to learn. 

So one of the very effective approaches a life insurance agent can adopt is that of a Co-Creation, that the prospect creates a solution by himself with some explanation of the technical terms by the agent. The agent has not come with predetermined solutions, but is only assisting the client to buy, what the buyer wants for himself. They jointly design the product/solution. 

So to show a specimen of one such co-creation effect, I am presenting a narrative of a sales conversation that took place between an agent and one Dr Kumar, who is a leading Orthopaedic Surgeon of Chennai. I am using Ag: to denote the dialogue of the agent and Dr K to denote the dialogue of Dr Kumar. 

Please also note that this is a real incident that I have been a part of while being incharge of a marketing vertical of a life insurance company long time ago. Only that I have changed the name of the prospect, so as to not to reveal the identity of the client. Also for this article I have considered the present dates for calculation so it will be relevant to the reader now.

The agent, after the initial introduction and the pleasantries are over, says to the prospect, 

Ag: “Sir, by spending a few years in this industry and having been associated with very good clients, I have understood that they have very thoughtfully purchased Financial Assets like Insurance, Mutual Funds, Equity investments, Real estate and a few other instruments. Therefore my role in many such situations is only to explain some scientific tests that a person needs to get done for himself to ascertain that he will be able to realise all his dreams about himself and his family. After doing the tests we jointly compare the results of the tests with that of the portfolio of assets that he has already designed to see if they are properly aligned. In some cases we find that they are in perfect alignment and there is no gap between the test results and their assets. In some cases we spot gaps. We then analyse the situation to find out should we fill up gap with any new assets or should we partially fill it up and even ignore the gap for now.

Dr Kumar I am sure you would also created a portfolio with some insurance policies, MFs, equities and other assets, so if you permit me I will present to you a few scientific tests, that will help us understand about our financial status accurately.

Dr K “Yes, I am already having a few investments and also insurance policies. I was thinking of taking a life insurance policy of 10 lakhs, I can pay a premium of 1Lakh rupee per year for 10 years, but now you are suggesting that we do some tests, tell me how much time will this take.?

Ag: Dr Kumar in that case I will explain only two tests, the first one may take about 10 minutes and the second one may take about 20 minutes. In case you have some questions in-between or some suggestions to offer then this may take slightly more time than that.

Dr K: Ok go ahead.

Ag: This first test is called A/H test, which can show us mathematically the extent of the dependence that our beloved ones have on us.

Accordingly the test was done and the following result is shown:

	PRESENT SOURCES OF INCOME FLOWING INTO YOUR FAMILY	₹
A	YOUR OCCUPATION	97,00,000
B	SPOUSE’S OCCUPATION	0
C	BANK INTERESTS AND INTEREST INCOMES	60,000
D	RENTALS AND LEASE INCOME	2,40,000
E	DIVIDENDS	0
F	PARENTS OCCUPATION/PENSIONS	0
G	ROYALTIES OR OTHER INCOMES	0
H	TOTAL INCOME FLOWING INTO THE FAMILY	1,00,00,000

Ag: This test shows that your A/H Dr Kumar is 97%

Dr K: What is the inference?

Ag: That since the family is dependent on your occupational income to the extent of 97%, they are technically speaking in a “Very High Risk Zone”. So our priority need will be to transfer the risk to an insurance company, so that our family will be in the Low or negligible risk zone. 

Dr K: But I already have an insurance policy? And I also have other assets?

Ag: Dr Kumar all those assets with the insurance policy you are having may be sufficient to provide for the risk involved. So let us do the second test and decide as to how sufficient they are?

Dr K: Ok go ahead.

Ag: This test has two parts, the first part is to identify and prioritise our responsibilities and the second part is to quantify it. The responsibilities that individuals carry on their shoulders differ from person to person. So it may not be correct on my part to assume one’s responsibility based on his age or background. So I have prepared a list of 10 responsibilities that by and large people of your age have. I will present this list to you. It is likely that some of these may not be relevant to you in your present position, we will remove them from the list. It is also like there are some other responsibilities which are not in this list but you feel that you have on your shoulders, which we can add to the list.

So this is the list of those 10 responsibilities, let us go through this one by one and select the relevant ones. In case you feel that your spouse should be present while doing this, that a proper identification can emerge, you may please invite her to join, or else we can both together complete this exercise. 

Dr Kumar calls Mrs Kumar to join and he briefs her of what we are about to do.

The couple identified as their responsibilities as under:

	RESPONSIBILITY	APPLICABLE/ NOT APPLICABLE
1	CHILDREN EDUCATION	YES
2	THE BEST IN THE GLOBE GRAD/PG	YES
3	SETTLING DOWN CAPITAL FOR CHILDREN	YES BUT NOT AN ABSOLUTE NECESSITY
4	GRAND AUSPICIOUS MARRIAGE OF CHILDREN	YES
5	SPOUSE WELL BEING	YES
6	PARENTS/IN-LAWS COMFORTS	NOT APPLICABLE
7	TO PROVIDE FOR INCOME SUPPORT EVEN AFTER FALLING ILL/DISABILITY	YES
8	SETTLE LIABILITIES TO HAVE A DEBT FREE LIFE	YES
9	SELF RELIANT RETIRED LIFE	YES
10	OTHER IMPORTANT GOALS:	NIL

Ag: Our next exercise is to quantify these responsibilities. The couple tried to approximate the amounts required and the same was captured as under:

Year	Required for ongoing essentials with inflation @8%	Higher Education	Marriage	Personal Loans	Business Loans	Cash flow required
2021	60,00,000			1,00,00,000	3,00,00,000	4,60,00,000
2022	64,80,000					64,80,000
2023	69,98,400					69,98,400
2024	75,58,272					75,58,272
2025	81,62,934	1,00,00,000				1,81,62,934
2026	88,15,968					88,15,968
2027	95,21,246					95,21,246
2028	1,02,82,946					1,02,82,946
2029	1,11,05,581					1,11,05,581
2030	1,19,94,028					1,19,94,028
2031	1,29,53,550					1,29,53,550
2032	1,39,89,834		1,00,00,000			2,39,89,834
2033	1,51,09,021	1,00,00,000				2,51,09,021
2034	1,63,17,742					1,63,17,742
2035	1,76,23,162					1,76,23,162
2036	1,90,33,015					1,90,33,015
2037	2,05,55,656					2,05,55,656
2038	2,22,00,108					2,22,00,108
2039	2,39,76,117					2,39,76,117
2040	2,58,94,206		1,00,00,000			3,58,94,206
NPV@6%	₹ 13,59,92,540.78	₹ 1,83,33,926.66	₹ 1,83,33,926.66	₹ 1,00,00,000	₹ 3,00,00,000	₹ 19,39,77,102.69
Saleable Assets						-₹ 30000000
Business assets casheable						-₹ 5,00,00,000
Short fall						₹ 11,40,00,000

Ag: This ₹11,40,00,000 gap is called, Dr Kumar, as the Protection gap. This has to be bridged through a life insurance policy of that value.

This Dr Kumar if we consider as the target amount we can decide on how much of this can be bridged immediately based on the amount that you will be able to spare considering your present commitments. 

We can decide on this based on the following table, wherein we identify the minimum level requirements, adjustable level requirements and used to level requirements. After further discussions with Dr Kumar and his wife the following table was agreed upon:

Year	Required for ongoing essentials with inflation @8%	Higher Education	Marriage	Personal Loans	Business Loans	Cash flow required
2021	60,00,000			1,00,00,000	3,00,00,000	4,60,00,000
2022	64,80,000					64,80,000
2023	69,98,400					69,98,400
2024	75,58,272					75,58,272
2025	81,62,934	1,00,00,000				1,81,62,934
2026	88,15,968					88,15,968
2027	95,21,246					95,21,246
2028	1,02,82,946					1,02,82,946
2029	1,11,05,581					1,11,05,581
2030	1,19,94,028					1,19,94,028
2031	1,29,53,550					1,29,53,550
2032	1,39,89,834		1,00,00,000			2,39,89,834
2033	1,51,09,021	1,00,00,000				2,51,09,021
2034	1,63,17,742					1,63,17,742
2035	1,76,23,162					1,76,23,162
2036	1,90,33,015					1,90,33,015
2037	2,05,55,656					2,05,55,656
2038	2,22,00,108					2,22,00,108
2039	2,39,76,117					2,39,76,117
2040	2,58,94,206		1,00,00,000			3,58,94,206
NPV@6%	₹ 13,59,92,540.78	₹ 1,83,33,926.66	₹ 1,83,33,926.66	₹ 1,00,00,000	₹ 3,00,00,000	₹ 19,39,77,102.69
Saleable Assets						-₹ 30000000
Business assets casheable						-₹ 5,00,00,000
Short fall						₹ 11,40,00,000

Ag: Here we are assuming responsibilities only till the daughters get married and settle down in their lives, and that they will take care of their mother for the further period of her life. Dr Kumar’s intention was to get the children to pursue education in medicine that they will take over and run the hospital that he is now owning. 

Ag: Dr Kumar we have only arrived at the Protection gap, we will still have to quantify the Savings gap for all those major responsibilities and also for your Self reliant retired life. 

Ag: Dr Kumar you have now designed your future map of life and also arrived at the Investments required to fund that journey. All that is now required to make a good start at this plan and also the paperwork and the formalities required to put this plan in place. If you are satisfied with road map, can we now happily begin the construction of the same? 

Dr K: Yes we shall begin now.

Ag: Dr Kumar will you be comfortable to begin with the minimum level table that we have done above and then review the same every year and keep topping up till we reach our target amount?

Dr K: Yes I think that is what will suit us.