Assurance through insurance

Switch on the TV and you will see at least one advertisement for you to take an insurance policy. Remember ‘Sar utha ke jiyo’ and ‘Zindagi ke baad bhi, zindagi ke saath bhi’? Most parents take a couple of insurance policies for securing our futures. Insurance is basically that friend of yours who is there when you feel low and gives you a sense of security in your life.

Life is full of uncertainties. Insurance protects us from probable future losses that might put us into a state of financial disadvantage. No one willingly wants to pay the full amount for any damage incurred and insurance helps us to avoid bearing the loss of the full amount. Hence, the insurance company pays a sum of money to compensate for the loss incurred. We make periodical payments called premium to the insurance company and in return, they help us cover the loss incurred, if any.

For example, if you have a factory producing electric items, there might be a possibility of a fire accident. So it’s better to have a fire insurance.

The agreement of the insurance is called a policy. The terms and conditions of this are varied for every individual. The company providing the insurance is known as the insurer and the person or organization which is protected is known as the insured.

Insurance is not a necessity but it is a must! Here’s why:

  • Paying for an insurance premium does not mean that you won’t face any loss. It just means that the loss will be spread over a large number of policyholders. Thus, your risks are shared with others.
  • Businesses often invest a huge amount of money on machinery and land. Taking insurance on these assets is a smart decision as it safeguards us from sudden loss or damage. Any damage caused to the asset will not be borne by you individually. 
  • When you borrow something, having insurance assures the lender. For example, if you buy a home on a mortgage, having home insurance on it will act as a protection for you and your lender too, as they will have a guarantee of the money being repaid even during adverse circumstances.
  • It protects your family and business in uncertain times. You will earn profits some year and you might incur loss another year. To ensure stability and a proper livelihood unaffected by monetary loss, we need an insurance policy. 
  • If you are the sole bread earner of the family, it’s very important to have insurance so that your family does not go through any financial strains in your absence. Many families just rely on a single member financially. Thus, the unfortunate demise of that member can cause a huge financial loss to the family. 
  • The funds received by the insurer from the insured in the form of premiums are sometimes invested on their behalf. Hence, we can earn money too by investment returns.

Choosing the right kind of insurance is very important. There are a variety of insurance policies offered by various firms. This makes the process of selection a little tedious. We must consider the premium amount, our income, financial plans for the future, whether it is for an asset like a car, life, or business. Let us see the most common insurances:

LIFE INSURANCE:

They say that life insurance is the most valuable possession you can leave for your loved ones after you are gone. In this, a person pays the insurance company so that it pays a maturity amount to their family after their demise. The risk is the death of the insured. It can be paid periodically or in a lump sum. The insured decides a nominee who is to be paid. Sometimes, a maturity amount is paid when the insured reaches a certain age. Thus, there is a guarantee that the insured (or the family) will receive a certain amount either after the person’s death or after they attain a certain age. There are many kinds of life insurance policies taken for different purposes.

Example: Whole life policy- it is paid after death.

Endowment life insurance- it is paid after attaining a certain age.

Children Endowment policy- taken for the education or marriage of your children.

HEALTH INSURANCE: Good health is precious, yet uncertain. We must take good care of our health. Sometimes, even after taking precautions, our health can deteriorate due to the dynamic nature of the environment and the exposure to various dangers. We often run on a tight budget and don’t save enough money. The money we have might not cover unexpected changes. Like many times, when we keep money aside for medical expenditure it’s usually a small amount which can only cover the cost of daily medicines and regular flu. But this amount might not help you if, God forbid, you or your family member meets with an accident or suffers a major health concern. In such cases, health insurance is very helpful. They pay a certain amount of money which is required for the medicines, hospitalization and/or treatment of an accident, disease, illness, etc.

DISABILITY INSURANCE: This insurance can help substitute as a source of income if you lose your job. Many people lose their jobs due to various reasons. We live in a competitive world where there are more people but fewer job opportunities. With the emergence of technology, manpower’s requirement is going really low. We can lose a job if we fall sick for a long period, shift to another city, due to our unprofessional behaviour, frequent disputes, etc. In such cases, disability insurances pay us a certain percentage of our income for survival.

CAR/ AUTO INSURANCE: Cars and other vehicles are prone to accidents and theft. A car is a very expensive asset for a middle- class family. This insurance pays them a certain amount if there is a damage caused to the insured vehicle. We must opt for auto insurance as soon as possible. In a few places, it is compulsory to have car insurance. The auto insurance policies in India do not cover losses caused due to electrical or mechanical breakdown, drunk driving, and when the damage is caused outside the geographical boundaries.

BUSINESS INSURANCE: This insurance gives you the confidence to take risks. Every business has its share of failures and success. Taking risks is vital for a business to grow. These risks can lead to either profit or loss. Sometimes, the loss incurred is too much to handle alone. This is where business insurance helps us. It helps us to cover a certain percentage of the loss. We should always have business insurance to ensure that our business survives harsh conditions. It protects us from loss caused due to damage of property, professional liability, workmen compensation, etc.

Other common insurance policies are home insurance, fire insurance, pet insurance, etc.

 

We study the entire syllabus even after knowing that certain questions won’t be asked in the exams. We do so to be better prepared. Similarly, insurance prepares us better for all that life throws at us. Sure it cannot insure us against the emotional loss suffered, but it helps like a financial shock-absorber during times of grief and loss. Unfortunately, many people have a mindset that they should not take insurance when the chances of the accident or the event occurring are not 100%. Hence, when they actually face a loss, they are not prepared or well-equipped to handle the situation and drain themselves to cover the loss incurred.

Therefore, we must understand that insurance is not a waste of money as it can help us face losses in a distributed manner. We must get all our big assets insured. People should change their mindset from- “Oh! We will figure it out when it occurs” to “I have already figured out a way”.

As Luis A. Ortiz Haddock said, “Life insurance is like a parachute, if you don’t have it the first time you need it, there is no second chance.”

Team Investoday