Nov 02 2022
How to pitch the right insurance portfolio for retirement planning to counter inflation
By Zabeen Motorwala
Inflation is affecting most people everywhere in the world these days, including in India. Gajendra Babaria, a two-year MDRT member from Mumbai India, emphasizes the importance of explaining inflation to his client and its impact on lifestyle and long-term savings.
He explains that in assisting clients to identify their future goals and funding needs, the financial advisor’s plan recommendation should be based on the client's actual needs rather than the client's ability to pay. Offering an example, Babaria says, “There are a number of clients, who do not have any dependents. Despite the fact that they have sufficient funds, I advise them not to purchase insurance because there is no insurable interest.”
Babaria believes that while suggesting retirement products to clients, financial advisors should consider three main factors:
1. The future value of monthly expenses
2. The number of years considered in retirement
3. The number of years left in retirement
4. When determining the right product mix for his clients, Babaria swears by the principle of "give time to your investments rather than timing your investments."
Countering inflation and client complaints
Babaria underlines the value of making plans early to combat inflation. He believes that financial advisors should suggest starting early in insurance. “It is highly advantageous because a lower age comes with a lower premium and higher cover or security, resulting in more benefits at a lower cost,” he points out.
He prefers to advise his clients to pay their premiums before the age of 45, citing the fact that insurance premiums in India are unaffected by the rate of inflation. Clients immediately reap the benefits of these suggestions. This, he believes, is what helps him gain their trust and confidence.
“It should be general practice among financial advisors to ensure that the client is informed and in the loop in the event that there is an inflationary increase in the premium for clients who have yet to start their policies or who have not yet made their decision”, he maintains. This enables him to provide sound advice to his clients while also strengthening his business relationships. He mentions that, “I have received numerous messages from my clients since the beginning of the pandemic, thanking me after realizing that they have saved up to 40% higher premiums by proactively deciding to start their insurance cover.”
Furthermore, by keeping his client up to date on industry changes and the reasons why insurance companies must raise rates, he ensures client satisfaction and minimizes complaints. He believes that financial advisors need to take a step further to explain the importance of liquidity and its future benefit to his clients.
Weathering a low interest, high inflation environment
The golden rule, according to Babaria, is to stick to the 50-30-20 rule, which states that 50% of income should be used for regular expenses, 30% for wants and short-term goals, and 20% should be saved and invested for long-term goals.
Citing this as a must for all financial advisors, he says, “Even in the worst-case scenario, if a client follows this principle diligently, the 20% savings will undoubtedly cover their retirement for the next 30 years.”
When it comes to surviving a low-interest, high-inflation environment, Babaria observes that providing real returns above inflation has become extremely difficult in today's stagflation environment. He believes that, “The primary goal of any advisor is to look out for the client's best interests, and many innovative insurance products invest a significant portion of their portfolio in equity, providing market-linked returns as well as substantial insurance coverage.”
Additionally, there are also certain products which provide inflation-linked returns and certain products which provide a guaranteed internal rate of return (IRR) on the investment, he says. Hence, it is important for financial advisors to provide innovative solutions to clients that fulfill their needs.
Lastly, as a parting note, Babaria states, "If the client knows you have their best interest at heart and will always be available when they need you, they will always stay with you even if they can earn a higher return elsewhere."