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Tenzin’s Venn Diagram on Life Insurance The diagram A foolproof approach to your life insurance planning. The general perception of life insurance is that it is impossible to insure everything we need. Therefore we should only insure say, an amount of five times our annual income and hope for the best. This article seeks to debunk this myth. This is equivalent to carrying an umbrella everywhere you go and hope that it doesn’t rain. Even if you are lugging a big and heavy umbrella, what happens when it rains and you discover to your horror that it is full of holes? Do take note that if the umbrella is not waterproof, it is better off for you to discard it than to carry it around. Even a small but waterproof umbrella can do a better job of keeping you reasonably dry than the one mentioned above. Thus an adequately sized umbrella with no holes but smaller than your existing one will serve you better instead. Therefore our task at hand is not to maximize but to foolproof your current insurance program. This article may enable you to enhance the integrity of your insurance coverage without additional premiums. The likelihood is that you may even reduce your premiums with no loss in effective coverage. Life insurance by definition, is a financial tool designed to solve problems that arise from the three uncertainties in life, namely: dying too early (premature death), disability and living too long (longevity). Perhaps only the top 0.1 % of the population in terms of net worth does not face problems associated with the above uncertainties in life. However these very rich individuals with net worth in excess of say $20 million could very well be faced with the problem of dying at the WRONG time. For example, if his assets are held largely in shares and the stock market crashes. As a result he suffers a heart attack or worst, commits suicide, his estate could be worth less than half of what he intends to leave behind. Life insurance could therefore serve as a hedge against such volatility in his investment portfolio. Furthermore, insurance also serve as an additional venue for him to diversify his assets and reduce his risks even further. For the very wealthy estate taxes could be minimized most effectively with life insurance trusts. For the majority of us the above three issues are of great concern to us and our loved ones. Life insurance products are designed specifically to solve problems associated with such uncertainties. However, most products are multi-faceted in coverage and tends to overlap each other partially or otherwise. Inefficient insurance planning has led to the needless duplication of coverage and the unintended neglect of critical areas required protection. Thus I felt that this is best represented by the Venn diagram consisting of the three interlocking sets as stated below:
Please note that each subset has virtually infinite combinations of plans that qualifies to be subsets themselves. I have chosen to indicate wl as a subset of la for illustration. The above list is not meant to be exhaustive but we can safely assume that virtually all insurance plans are variations or hybrids of the above. Indeed few plans are unique in its coverage. One of the few is ip that covers strictly against disabilities but pays next to nothing upon death. However we do not need to be bewildered be the myriad of choices above so long we adopt a systematic approach toward life insurance planning that guarantees a foolproof protection plan. The basic 4 questions to ask ourselves are as follow: 1. NEED? By applying the Universal Rule of Insurance, we will quickly determine whether we are over-insured, under-insured or both. If the answer to your need is 'no,' we need not proceed further; unless we happen to be over-insured in which case we merely fine tune the existing cover. Next, we use the Venn diagram to help us prioritize our needs. Ideally all three uncertainties should be tackled simultaneously, but often we are faced with budget constraints that require us to take care of the most urgent issues at hand. A good insurance agent will be able to help narrow down the options available. 1. Investment linked products transfer the risk of investment to the policyholder and should be considered with prudence. 2. A guaranteed insurability benefit is a promise to provide a fixed increase in the sum assured of the death benefit within a limited time period regardless of any health changes; by itself it doesn't pay anything upon a claim. 2. HOW MUCH? 3. BUDGET? 4. WHO? Beyond that, engage an agent whom you feel comfortable enough to invite to your house on at least a yearly basis. Life insurance is probably the longest sale in the world and beyond. That is why it is important that you and your family can rely on him or her to take care of your needs over many years to come. The Application of the Venn diagram Case study
#1:
Term policies do not interest her unless she plans to have children in the future. Even then, it may not be necessary to take it up in advance. Her concern is to protect against disabilities leading to loss of income earning potential. Therefore an income protection plan that covers against injuries and illnesses applies. A whole life plan with accumulating cash values will provide a good supplement to her retirement income. Living assurance policies has a considerably lower yield and if budget does not permit it may be advisable to concentrate on Medishield plans instead. Investment linked policies may be considered if she can take the risks. One may be tempted to adopt only the set of D n Di n L since whole life plans apparently cover all areas. However whole life plans cover only total and partial disabilities (TPD) and not partial and/or temporary disabilities as represented by the set of (D u L)'- The complement of the union of set D and L. It may be prudent to provide for the future need of death cover and include say the guaranteed insurability benefit in the package. The solution set will then be (D n Di n L) u D' u gi The union of the set ((D n Di n L)' u D') and the set gi. (see Fig. 2) Case study
#2:
An annuity will do, preferable one that provides a guaranteed fixed income for say 10 years. If he can take the risk, a single premium investment-linked policy may be a good supplement to his annuity. Alternatively he may wish to mortgage his property to the insurance company and draw on his capital gains in the form of an annuity. (see Fig. 3) From the two case studies above we are able to illustrate the versatility of the Venn diagram. It serves as a useful tool to ensure that we do not neglect any of the critical areas of our life insurance planning. Virtually any scenario can be reflected on the Venn diagram through its intersection and union between the sets and the subsets. The foolproof plan will be the Universal Set U = D u Di u L u gi where we fully take care of all the three uncertainties. Simply by shading the required area on the Venn diagram gives an indication of our most pressing problems that need to be addressed. Although it is tempting to yield to a 'one for all' plans such as living assurance i.e. D n Di n L -- The intersection of the sets D, Di and L, it is easy to neglect important considerations such as hospital and surgical plans that are not covered in the intersection. Conclusion Since life insurance products are designed to solve problems that arise from premature death, disability and longevity, we can safely assume that all insurance plans must therefore fall within the Venn diagram. This is a powerful aid in enabling us to determine instantly whether any product that we come across falls within the category we wish to insure. We can then ignore it if it doesn’t. Similiarly the shaded areas will quickly enable us to find out if we have neglected any problems that need to be addressed. By adopting the above strategies we can then safely guarantee a foolproof life insurance program and have the peace of mind we seek. The combinations provided by the Venn diagram as represented by the shaded areas are useful for illustrating the types of plans required to solve the problems we want to address. The equations and symbols involved are meant to be an aid for the mathematically inclined. Simply shading the area required without expressing it in equations will still do for most practical applications. We must also take note that the Venn diagram only describes the areas of consideration but does not help us in determining the sum assureds or our budgeting. Nor does it enable us to determine the combination of the types of plans to adopt as illustrated in case study #2. Certain hybrid subsets fall into the grey category of being in set D or L depending on product design. For example, a large endowment maturing at age 65 may very well ensure a comfortable retirement and fall within set L instead. Such issues are best resolved with your insurance agent face to face. A good insurance agent will also do his best to motivate you to take action against what is possibly our greatest enemy—Procrastination. When the solution is affordable and presented clearly, go ahead and take action! Do not ‘think about it’ for the sake of it alone. Remember that for most people life insurance planning is a course of necessity and there will always be competing demands generated by the consumer society. Our priority should always be to take care of our basic needs first. Only then can we spend the remainder happily and truly enjoy life’s little luxuries without worry. Disclaimer The above concepts and case studies serve strictly as a guide only and are not intended to be taken as an advice on insurance planning. Please consult your insurance agent for details. |
