Insurance can be termed as a contract between two parties, whereby one party called the insurer undertakes to pay the other party called the insured, a fixed amount of money on the happening of a certain event, in exchange for a fixed sum called premium.
Insurance is basically a protection against a financial loss, which can arise out of an unexpected event. By paying a small sum of money, a person can safeguard herself/himself and her/his family financially from an unfortunate event, like say, death of the earning member in a family.
Thus insurance helps you in your risk management. The risk can arise in the form of accidents, fire, flood, theft, terror attacks (like the one witnessed in Mumbai recently), some major illness, or even death.
The general perception of the common man regarding insurance is limited only to life insurance, and to some extent health or medical insurance. Alas! Such is the level of ignorance even today. But risk management does not end here. Adequate amount of insurance in the form of life as well as non-life insurance is the right way to manage risks.
The different types of insurance products available to people are life insurance, health or medical insurance, vehicle insurance, home insurance, travel insurance, etc. Though a number of insurances are available today it is not necessary to buy all of them. But a few are must for risk management. Let's take a detailed look at them:
1. Life insurance
There are a lot of my clients who ask me, "Why should I buy a life insurance policy? What good would the insurance money be to me after I die?"
What a selfish thought, I feel. Our family means the world to us, so shouldn't we make sure that their financial future is secured even after our death? Insurance protects our loved ones from the financial problems that may result from the death of the earning member of the family. This is especially true in the wake of the recent terror attacks. It also protects our family from personal risks like repayment of debts, home loans, credit card payments, and others.
The important question to ask is: What amount would suffice your dependants after your death? Listed below are a few of the components to be taken into account when deciding how much insurance cover you should buy:
Number of dependants in your house
Inflation adjusted returns
Your current cost of living -- especially the fixed and variable mandatory expenses, which have to be met come what may
Existing investments and
Existing liabilities
Based on the above components, you can determine the insurance amount required.
Important note
In the light of the recent terror attacks, please make sure that your insurance company covers death due to terrorist attacks. Some insurance companies do not cover it.
Also, do remember if you are not earning post retirement be sure not to buy life insurance as you are no longer a help to your family financially. In fact post retirement it is more important to have a health insurance policy in place.
Sheetal Jhaveri is a financial consultant and can be reached at dhanplanner@rediffmail.com.
Illustrations: Uttam Ghosh & Dominic Xavier
Also see: Young Investor: Importance of asset allocation
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