Monday, January 20, 2014

Basics of Insurance



Insurance offers peace of mind, security and a safety net. It allows for the unexpected to happen, and for your family to be able to manage.

There are many types of insurance, and clients buy insurance for many different reasons. As a Financial Advisor I am committed to guiding you through the maze of information, options and decisions in regards to insurance and protecting your family.

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

Let me first answer all those who say  “ I don’t  require Insurance ”……,such people give various reasons   to support and win this argument but in practical terms they are or may be unknowingly losing  a lot. Generally I ask following few questions to such people-

1.    Do you use Helmet while driving a bike?

2.    Do you have a Locker for Valuables?

3.    Do you have Lock and Key to your house or car or bike?

4.    Do you Plan something?

5.    Have you ever sealed an envelope or a parcel?

6.    Do you put aside certain portion of income as cash? and some other portion parked into savings?

7.    Do you have  alarm or central locking system installed in your car?

And if most or even one answer is YES, the person is at least unknowingly using or applying Insurance theory. These are day to day activities and some or the other way, knowingly or unknowingly we are using this concept.

Insurance is important for many reasons and can be used to:

  • Protect the income stream of your family (maintaining your standard of living)
  • Pay off debts and provide money at the death of the insured
  • Provide a source of retirement income
  • Fund a child's education
  • Create or sustain a family's wealth
  • Cover funeral expenses
  • Cover estate taxes - providing funds necessary to prevent the liquidation of assets
  • Cover the cost of living expenses and time off work due to sickness or injury
  • Ensure resources aren't drained in the event of an unexpected illness or injury
  • To protect entity from losses to Assets like car, home etc.

The bottom line is it provides peace of mind for you and your family.


Auto Insurance

Auto insurance protects the policyholder against financial loss in the event of an incident involving a vehicle they own, such as in a traffic collision.

Coverage typically includes:

  • Property coverage, for damage to or theft of the car
  • Liability coverage, for the legal responsibility to others for bodily injury or property damage
  • Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses

Life Insurance

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.

Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.

Property or home insurance

Leading financial institutes and insurance companies offer home insurance schemes under which the structure and/or contents of the home are protected as per the preference of the owner. The home insurance policy covers damage done by natural calamities as well as humans. To elaborate, the policy insures the damages done from fire, burglary (covers theft of jewellery, silver articles and precious stones), riots, terrorism (Optional cover), earthquakes, flood, aircraft damage, hurricane, bursting of pipes, damage done by road vehicles, lightning, landslides and explosion of hazardous material. The sum insured under the home insurance policy is for structure of the home; however, it is calculated according to the reconstruction value of the home i.e. the cost incurred after the damage and not according to the market value of the home. The reconstruction value is based on the material and labour used in the home. Similarly, while setting the value of the contents of the home, the future depreciation value is calculated.

Health Insurance or as we know as Mediclaim

Health insurance provides risk coverage against expenditure caused by any unforeseen medical emergencies. In current times of high medical inflation rates, failing to hold adequate amount of health insurance cover can prove to be a major personal finance disaster. This could lead to either poor health care because of non-affordability or spiral an individual into financial distress due to high medical bills.

There are two common mistakes when it comes to buying life insurance and health insurance.

  • People don't act at the right time, and
  • When they realize that they have made a mistake they try to over-compensate by buying too much insurance.

There is a popular saying about health insurance: "Buy health insurance when you don't want it, because you may not get it when you want it."

Currently, majority of the salaried professionals are provided health insurance cover by their organizations. Majority of the employees are increasingly dependent on such health insurance cover to counter their health contingencies. However, they often fail to assess their health insurance requirements and don't realize the benefits. It is advised that professionals opt for personal health insurance cover as well.

Casuality or Accident Insurance

This covers expenses or probable income loss incurred due to Accidents.

Critical Insurance

This is an extension of Medical insurance, which covers expenses due to Defined Critical illnesses and being insured under this, has an added advantage along with general medical insurance

Liability Insurance

Business, Employment insurance, Limited liability insurance etc are loss avoiding covers.

Travel and Baggage Insurance

This is designed for people who Travel for longer period or are travelling on regular basis, a term called frequent fliers. This may or may not cover Baggage insurance as per choice.

Above are certain commonly sold or taken insurances, others also exists, but will talk separately. I am even cutting short on above list details, and will write separately.

The contract of Insurance is valid for payment of the insured amount during:

  • The date of maturity, or
  • Specified dates at periodic intervals, or
  • Unfortunate event, if it occurs earlier.
After knowing Basics of Insurance, which insurance company to go through, is another question ? "Which and why of Insurance Company", I may handle sometime later, but below are number if companies offering there products in each category-
LIFE INSURANCE- 24 companies (as per IRDA site updated as on 2.9.13)
NON-LIFE / GENERAL INSURANCE - 27 companies (as per IRDA site updated as on 11.2.13)
I know, next obvious question is how to know which good or bad and what should be the filters to watch out for? I will handle this in simple manner later.; here I have to answer basic of Insurance.

So Why Insurance?-


Easy Regular Savings

Liquidity (in case of Life Insurance)

Tax Saving

Small payments, big losses or income covered

Actually and Practically thinking, this is only investment in which outgo is the least as compared to guarantee of inflow, especially in case of dire circumstances. Take any example and you will know.

Example: Life Insurance-

If a normal healthy person takes endowment policy which covers insurance of Rs.!0 Lacs, his or her outflow for next 20 yrs would be averagely around Rs.40000 p.a., now if in third year, normal death occurs to the insured, by just paying Rs.40000 p.a. a sum of Rs.10 Lacs is given to his/her family. If I put for a minute emotions apart, and look only from economics point, tell me which other investment gives such guarantee, and if you take a Term Insurance for same 10 lacs life insurance outflow would be much lesser.

Example: House and contents insurance-

As a part of Financial Planning, Risk Planning is also done and I also cover asset insurance. Recently I have given a quotation of around Rs.11000 p.a. for around Rs.1 cr. valuation of House and contents. This is merely 0.11% of the sum assured. Where else would I get such returns or for that matter guarantee.

Basic idea is  "PEACE OF MIND", while one is actively involved in day to day activities, which helps one concentrate more and excel in life.

All said and done, still if you ask me, one should ask self and get the answer of "WHY am I thinking of buying Insurance", that's your correct reason to buy insurance.....Also refer to my previous article on "Shortest Secret to Buying Insurance".


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