How to build a Household Protection Plan

A household protection plan is seven steps. List the risks. Put a cost against each one. Mark which of them the household could absorb from what it can reach. Mark which it could not. Check what is already covered and read the limits rather than the sums insured. Name what is left uncovered and decide about each one deliberately. Then set the whole plan down on a single sheet.

Six of the seven steps produce nothing new. Each of the six assembles things the household already had lying around in different places: what leaves in an ordinary month, what it can reach by tomorrow morning, what one claim actually did to it, what a policy schedule says on its second side. The seventh step, deciding what to leave uncovered, is the only one that asks anybody for anything, and it is the one that turns a list into a plan. Why any single step works is covered separately. The order is the whole of what this guide adds.

What is a household protection plan, and what does it produce?

Most descriptions of a protection plan go wrong about what comes out of the far end. Start there. A finished protection planA written record of which risks are covered, which are carried by the household itself, and why each line reads the way it does. is a written record of the risks the household carries itself, the risks something else carries, and the decision made about each. The record is not a list of things to buy. The output of the seven steps is a set of decisions, and a decision to keep a risk exactly where it already sits is one of them.

Think about the key board in a housing society office. The board does not say who ought to hold the key to the terrace or the pump room. The board says who does hold it, on a card, in one place. At two in the morning, with water coming through a ceiling, nobody stands in the corridor working out whom to wake. The value was never in the keys. The value is in nobody having to reconstruct the arrangement with the water still running.

A protection plan is that board, for money. Every household already has an arrangement, whether or not anybody wrote it down: something is carrying each risk, and where nothing is carrying it, the household is. Writing it down changes nothing about the arrangement and everything about how fast the household can act inside it. The plan does not make a household safer on the evening it is written; it makes the household faster on the day something happens.

Three things it is not, worth saying plainly because each of them is what people usually mean when they say the words. A plan is not a budget. Nothing on it is a monthly amount. A plan is not a shopping list. Nothing on it names a product. And a plan does not tell the household what to do. The seven steps produce the position and never say which position is right. The household decides. The sheet records what it decided.

Step one: which risks go on the list, including the ones nothing is sold for?

Every event that would change what the household has, what it owes, or what it can do next month goes onto the list. Not the ones somebody sells cover for. Every one. A risk earns its place on the list by being able to happen to this household, and by nothing else. Which risks belong there, and the order they sit in, is covered separately.

The instinct runs the other way, and it is worth naming because almost everybody has it. Asked what protection they need, most people begin by listing the products they have heard of and then hunt for reasons to hold them. Hunting for reasons produces a list three items long that stops exactly where the market stops. Starting from what could happen produces a longer list, in a different order, most of which nothing is sold for at all. A list that starts from what can be bought will never contain the risks nobody has built a product for, and those are usually the ones a household meets first.

The Bhosale household wrote six lines. Meghna Bhosale's earning stopping for good. A serious health event for any of the three of them. Meghna Bhosale's earning stopping for a while rather than for good, through illness or injury. Ashok Bhosale's counter income stopping, a thing that has already happened once. The two-wheeler being damaged or stolen. And the household's belongings being lost, in the ordinary way belongings are lost, by fire or water or theft.

Step two: how is a cost put against a risk nobody has met?

Beside each line, write what it would take to put the household back where it stood the day before. Writing that figure is costing a riskPutting a figure against what an event would cost if it happened, so that risks of very different sizes can be sorted against one number., and it is the step people stall on. Four of the six lines have never happened to anybody in the house. The stall is caused by looking for the wrong kind of number. A cost here is not a prediction and it is not an average. A cost is an amount, on the household's own inputs, describing one instance of the thing.

There are only three places the amount comes from, and every line on any household's list draws from one of them. The first is an event this household has already met, where the figure is on a bill or a bank statement. The second is a computation of what would have to be replaced, arithmetic rather than forecasting. The third is an estimate the household already carries for something else, such as what it thinks its vehicle would fetch. Costing a risk is a matter of finding which of those three the line belongs to, and it is not a matter of estimating a probability at all.

Now the honest part, left out of most descriptions. Some lines cannot be costed by anybody, and the household will meet one of them tonight. The rule for those is not to guess and not to leave the line blank. Write the words that describe the position, mark the line as uncosted, and carry it forward to the decision step, where it gets a decision like every other line. A guessed figure would have been sorted by the next two steps as though it were real, and a blank line is quietly dropped by whoever reads the sheet next.

Look at the third column rather than the second. Two of the six figures came from events this household has already lived through, two came from arithmetic it had already done for other reasons, one came off its own balance sheet, and the sixth has no figure at all. Not one of the six costs required the household to predict anything. An evening is enough for a step that sounds like it needs an expert.

Step three: which risks could the household absorb from what it can reach?

Take the costs one line at a time and hold each against a single number: what the household could put its hands on by tomorrow morning without borrowing and without selling anything. Holding each cost against that number is the absorb testOne question asked of every costed risk: could the household survive it from money it can reach quickly, without borrowing and without selling something., and it does the sorting for the rest of the plan. One number, one question, six answers.

Two rules govern the number itself, and both get bent. The number is money reachable quickly, not the household's net worth. And it is the whole of that money, even though the household would rather not spend all of it. The test asks what is survivable rather than what is comfortable. For the Bhosale household the figure is Rs 41,887/-, being the two bank accounts and nothing else, and it was already written down long before this evening.

Here is the part that surprises people the first time they do it. The absorb test is not close for most lines. A risk is usually either obviously inside the number or several multiples outside it, and the household spends about ninety seconds on the whole step. Only one of this household's six risks passed the absorb test, and the one that failed by the smallest margin failed by Rs 1,313/-, close enough to feel like a pass and not one.

Step four: which risks could it not absorb, and what is the short list for?

Turn the sheet over and copy across every line the absorb test did not clear, plus every line that carried no cost to test. The copied list is the only thing the remaining steps look at. Everything else has been answered: a risk the household can meet from money it can reach is finished business, and no policy, no premium and no further thought is owed to it.

Count carefully here. A plan quietly loses a line at this step. Six risks went into step three. One of them, the belongings, carried no cost, so there was nothing to hold against Rs 41,887/- and it was never tested; it goes forward whole. Five were tested. One of those five, the two-wheeler at Rs 38,000/-, came inside the number and left the list. Four risks are left that the household could not absorb, and one uncosted line travels beside them. The short list is four names long, and the whole purpose of the first four steps was to get from a list of everything that could happen down to four things worth spending an evening on.

Notice what the short list is not sorted by. The short list is not the four most likely things. Two of the four have never happened to this household and one of them could never happen twice. Nor is it the four most frightening things. The four are the ones the household could not pay for out of money it can reach. Affordability is a colder question than likelihood or fear, and the only one that survives contact with a real week.

Step five: what does checking the cover already held actually read?

For each of the four names on the short list, fetch the document for whatever is supposed to be carrying that risk and read the parts that decide a claim. The instruction is slower than it sounds. The reading has an order. The sum is printed largest, so find it first and get it out of the way before it dominates everything after. Then find the term, meaning how long the thing runs. Then find the limitsThe clauses inside a policy that decide what a claim actually pays: daily caps, shares the holder carries, proportionate deductions and exclusions., meaning every clause that caps, shares, deducts or excludes. Write the limits on the plan, and write the sum beside them rather than instead of them.

The Bhosale household had two documents to fetch and two lines with nothing to fetch at all. For the first line, the earning stopping for good, it holds a term policy on Meghna Bhosale's life with a sum assured of Rs 25,00,000/-, taken three years before year one and running for twenty five years. Against a requirement of Rs 68,89,067/- that sum meets 36.3 per cent and leaves Rs 43,89,067/- the policy does not reach. Then the second reading, the term: six years have run and nineteen remain, against a requirement measured over fourteen. On this one policy the sum is short and the term is not, and a household reading only the printed sum assured would have learned exactly half of that.

For the second line, the serious health event, the household holds a floater covering all three of them with a sum insured of Rs 5,00,000/-. The household also holds something far more useful at step five: one settled claim. In year three a four day admission produced a bill of Rs 1,42,000/-, the policy met Rs 91,440/- of it, and the household paid Rs 50,560/-. Nothing was rejected and nothing was disputed. The document behaved exactly as it was written, and what it was written to do was carry 64.4 per cent of that particular bill.

The third and fourth lines took no time at all. Meghna Bhosale's earning stopping for a while has nothing carrying it, and Ashok Bhosale's counter income stopping has nothing carrying it either. Step five records the word nothing against both. A recorded nothing is not a gap in the plan. The plan is reporting a fact accurately, and the four steps before it are what made that fact worth writing down.

Why does step five read the limits rather than the sums insured?

Because the sum insured is the number that binds least often. The sum insured is the ceiling, and a household reaches the ceiling roughly never. An ordinary claim meets a daily cap on one category of charge, a proportion applied to another category because of that cap, a list of items nothing was ever going to pay for, and a share the household carries itself by contract. All four of those were working on this claim. The ceiling was working on none of it.

Take a Rs 5,00,000/- floater whose room rent limit and co-payment met 64.4 per cent of a Rs 1,42,000/- claim. The second figure describes it and the first does not. That is the whole of step five in one sentence, and it is worth reading twice, because the first figure is the one that gets remembered, quoted to relatives, and written onto a protection plan by anybody who has not been told to look further down the document.

There is a household version of this test that needs no document at all. Ask what the cover would do with a bill the size of the last one, and if the only available answer is a sum insured, then the reading has not been done yet. Where a claim has already been settled, the arithmetic is finished and sitting in a letter. A household that has had a claim reduced is unusually well placed at step five rather than badly placed. Such a household knows precisely what its policy does on a real bill. Most households are guessing at that.

One thing this step is not. Step five is not an argument that the cover was bad, or wrongly bought, or that somebody should have read more carefully at the time. The caps and shares are part of what made the premium what it is, and a policy without them would be a different product at a different price. Step five insists only that the plan carry the true figure. The step after it then decides about the real position rather than a hopeful one.

Step six: what happens to the risks left uncovered?

Take every line where the answer at step five was nothing, add the line that carried no cost, and write a decision beside each one. Each of those lines is uncoveredA risk nothing is carrying except the household itself, whether or not anybody has ever decided that it should be., and until this evening nobody in the house had said a word about any of them. Three decisions are available and they are all complete answers. The household can carry the risk knowingly, meaning it keeps it and knows it keeps it. The household can put a date on the line and look at it again then. Or the household can write down that it intends to find out what moving the risk elsewhere would involve, a question rather than a purchase. Which of the three to write is a question for the household and for nobody who has not met it.

The Bhosale household had three lines to decide and it spent most of the evening on them. Ashok Bhosale's counter income stopping: carried knowingly. The closure has happened once, it cost Rs 43,200/-, it was met with a card and it would be met much the same way again, and writing that down took one line. The belongings: carried knowingly as well, on the reasoning that the line cannot be costed and the household would rather record that plainly than pretend otherwise. Meghna Bhosale's earning stopping for a while: not decided, dated instead, and carried to the next review because it is the largest of the three and nobody wanted to settle it at eleven at night.

The dated line deserves a sentence of its own. A dated line looks like avoidance and is not. Carried knowinglyA risk the household has decided to keep, having seen what it would cost. A kept risk is a position, not an oversight. and dated for review are both decisions; only a blank is not. In both cases somebody has read the line, understood the number and chosen what happens next. Nobody will be discovering the position for the first time during the event.

Two lines on this household's sheet carry cover and still carry a note underneath. The term policy line records the Rs 43,89,067/- the sum does not reach, and the floater line records what the limits did to the one claim it has met. Neither of those notes is a decision about buying anything. Both notes give the size of what remains, written where it will be read again, and the review date carries them forward.

Why is a decision to leave a risk uncovered a plan, while an omission is not?

Because the risk is identical in both cases and the week that follows it is not. A risk nobody has decided about is not carried, only present, and the difference shows up entirely in the week it arrives. Nothing about the household's money changes when the decision is written down. The change is in how many days pass between the event and the first useful thing anybody does about it.

Watch this household. In year two the market lane was dug up for five months, the counter took Rs 52,800/- against the Rs 96,000/- of an ordinary year, and Rs 43,200/- of income did not arrive. On the plan written at the end of year three, that line reads carried knowingly. So when the lane was dug up again, nobody wasted a week wondering whether something was supposed to cover it. The question had been settled in April, and the week went instead on the two things that actually help: cutting what could be cut and looking for work the counter was not providing.

Compare that with the same household one year earlier, holding the same risk, having written nothing. The lane closes. Somebody remembers a policy. The papers come out of the folder on the third evening, are read for something that plainly is not in them, and by the end of the week the household has learned exactly what the plan would have told it in April, having spent six days it did not have. The risk was the same size on both occasions. The decision column is the only thing that separates a household acting in week one from a household still finding out in week one.

Step seven: what goes on the single sheet, and where does it live?

Five columns and one line per risk. The risk in the household's own words. The cost of it. Whether the absorb test cleared it. The name of whatever carries it, a policy or the word nothing. And the decision, the column the whole evening was for. Then a date at the foot, and the initials of whoever wrote it if two adults are involved. Neither then has to remember which version is current.

Where it lives is part of the step rather than an afterthought. The sheet goes with the papers the household already keeps and against the review dateThe fixed day a household has already agreed to look at its own papers, so a new sheet gets reread instead of filed away. it already has, not on a schedule invented for it. A sheet with its own calendar competes with everything else in the house for attention and loses. Nobody looks forward to reading it. Attached to a date the household already honours, it gets read.

Keep it to one sheetThe whole plan on a single sheet. A document that runs longer stops being reread and starts being filed.. The constraint does real work rather than serving neatness. A protection plan that runs to four sheets contains reasoning, and reasoning is what makes a document unreadable a year later, when the person picking it up wants the position rather than the argument. Six lines and five columns can be read in three minutes by somebody who did not write it, and that is the only test of the sheet that matters.

What does the whole thing cost, and when is it done again?

An evening, and no money at all. The absence of a bill is worth stating flatly. Protection is the one subject where people assume the work begins with a payment. Step one is a conversation. Step two mostly copies figures the household already had. Steps three and four are a comparison done six times. Step five needs two documents out of a folder and twenty minutes of unglamorous reading. Step six is the long one, not because it is difficult but because it is the only step where two adults may disagree. Step seven is ten minutes of writing.

Six of the seven steps are assembly rather than expenditure. A household with nothing set aside can finish the whole plan tonight and end up with something genuinely worth having. A reader whose plan turns out to say uncovered on every line has not wasted the evening. Knowing that four risks sit with the household and nothing else is strictly better than assuming, wrongly, that something somewhere is handling them, and it is the only starting point from which anything can be decided later.

The plan is done again when a line on it changes, and the sheet names the triggers itself: an income starts or stops, a policy is renewed on different terms, a debt clears or begins, somebody joins or leaves the household, or the review date comes round. The Bhosale household has one obvious trigger sitting in front of it. The dated line about Meghna Bhosale's earning stopping for a while is due at the next review, and that review will open with the one question the evening deliberately left unanswered.

What does the finished plan say for this household?

Everything above collapses into seven short entries. Read them as the household would a year later, when the reasoning has gone and only the position is left.

What happens when a plan stops at step five?

Step five is the natural place to stop, and that is exactly why it is worth a warning. By the end of step five the household has listed, costed, sorted and read. The sheet looks finished. The sheet has numbers on it, and numbers feel like an outcome. The missing column is the only one that changes anything at all.

Does finishing this plan mean the household should buy something?

No. The plan produces decisions, and a decision to keep carrying a risk is as complete an outcome as any other. On this household's finished sheet, written by people who had just watched a policy meet 64.4 per cent of a bill, the word that appears most often in the decision column is carried. Nothing was bought on the evening it was written, and nothing on the sheet says anything should have been.

The framework produces the position and stops there. How many years an earning would have to be replaced for, whether a second income continues, what a household is willing to keep on its own shoulders and what it would rather move elsewhere: those are answers only the household holds, and any framework that supplied them would be guessing at somebody's life from a distance. The seven steps set up every decision on the sheet and take none of them, and that is the design rather than a limitation of it.

All of this matters most for a household whose sheet comes out worse than the Bhosales'. A sheet that ends with six lines and six blanks in the cover column is not a failed exercise but a completed one, and it holds the one thing that was missing before, an accurate list of what sits with the household. Every decision that follows is easier from there than from a folder nobody has opened.

Who else reads a plan like this, and what for?

Three readers, and not one of them is an adviser. The first is the other adult in the house. In most households one person knows what leaves each month and the other genuinely does not, and the second person is often the one who will be dealing with whatever happens. A sheet with six lines means both of them can answer the same questions the same way in week one, without one having to reconstruct the whole position out loud on a bad evening.

The second is anybody assessing what the household can bear, in practice a lending desk looking at a loan application. Such a desk wants to know not how much cover somebody holds, but what carries the income that would repay the loan if the income stopped. A household that can answer that in one sentence is not being rewarded for holding a product. The household is being read as somebody who knows their own position, a different and more durable thing.

The third reader is whoever has to act after a serious event: a nominee, a relative or a neighbour with the keys. The value of the sheet to that third reader is entirely in what it saves them from doing, namely guessing under pressure about arrangements somebody else made. This is the use households most consistently underestimate, because it is the only one where the person reading the plan is not the person who wrote it.

The Bhosale household, Meghna Bhosale, Ashok Bhosale, Ira Bhosale and Sahyadri Freight Services Private Limited are invented.
Educational material. Not advice on any investment, tax, budget or market position.