Investors know asset allocation well: do not put everything in one asset, allocate according to your goals and life stage, and rebalance regularly. Few people apply the same principles to their insurance portfolio, even though they fit remarkably well. This article turns a classic investment principle into a tool for organising your cover.
Principle 1: diversification — spread the cover, do not concentrate it
A portfolio holding a single stock is a dangerous portfolio, and the same is true of insurance. Many people are concentrated without realising it — three endowment policies and no health cover, or a large life sum insured and nothing at all for disability. Think of cover as four asset classes: health, life, disability and income, and property. A good portfolio holds all four in proportions that reflect the real risks in your life, rather than reflecting who sold you what first.
Principle 2: risk-based allocation — budget by the size of the risk
Investors allocate money by goal; an insurance portfolio allocates premium by the severity times the likelihood of each risk. For most people, allocating a premium budget of roughly a tenth of income: the largest share goes to the risk that is both large and near — health; then life and disability according to who depends on you; then property and other supplements. If most of your budget flows to small risks, or to savings before the large risks are closed, the allocation is distorted — much like an investment portfolio holding 90% cash at age 25.
Principle 3: an age-based glide path
Investing has the idea of reducing equities and adding bonds as you age. An insurance portfolio has a similar path: in your twenties, health and accident cover matter most while the life sum insured stays light; while raising a family, life and disability cover peak with your obligations; approaching retirement, the life sum insured reduces as debts clear and weight shifts to long-term health cover and a pension. Knowing the path in advance lets you buy with the right tool — using term cover for the peak years rather than carrying a permanent premium. Our article on planning by life stage goes into more detail.
Principle 4: rebalancing — review the portfolio once a year
An investment portfolio is rebalanced when the proportions drift from target. An insurance portfolio needs rebalancing when life has drifted from the day you bought. Check three things each year: have your obligations changed (debt down, children older, income moved)? Do the four types of cover still match your risks? Is the total premium still within a sustainable range? Adjusting may mean increasing one sum insured, reducing another, or removing a rider that has served its purpose — just like selling an over-weighted asset to top up an under-weighted one.
Principle 5: core and satellite
Many investors build a stable long-term core plus satellites adjusted to circumstances. An insurance portfolio fits the same structure neatly. The core is long-term health cover and a permanent base of life cover — bought once, held long, rarely touched. The satellites are term cover for temporary obligations, riders suited to a life stage, and specific cover added or removed as events require. This structure keeps the portfolio both steady and nimble.
In short
Good financial principles travel across disciplines: spread cover across all four types, budget by the size of the risk, shift the proportions with age, rebalance every year, and separate the core from the satellites. If you can already build an investment portfolio, you already have the skill to build an insurance one — simply swap assets for cover. If you would like to work out the allocation of your own insurance portfolio, message us on LINE and we will do it together.
This article was inspired by material from the Thai Financial Planners Association (TFPA) and has been entirely rewritten.