The fundamental objective of insurance is to provide a means to offset the burden of financial loss. Think of insurance as a premium paid for “transfer of risk”. An alternate method of dealing with risk. You are paying an insurance premium (small cost) so that you do not have to pay a big sum later on.
A couple of days ago, I got a mail saying, “Insurance is a waste of money. I am 62 and never needed it.” I couldn’t believe it! It was such an amazingly stupid statement. “I” have not needed it does not mean “nobody” needs it. So, it’s quite foolish to talk like this. It can be akin to “nobody has ever stolen from our house, so I do not need to lock it at night”. Sounds convincing? No, right?
Here are a few old thoughts on insurance. Life or general, insurance is largely about answering some questions like “what if… goes wrong?”
Think of insurance as a means to offset the burden of financial loss. You are paying a small cost to avoid paying the total cost of a catastrophic loss (such as your house burning down). It’s fairly obvious that you may not insure your mobile phone (you can afford to carry that risk on yourself) but will insure your house (the burden of this risk is too heavy to carry). So, you transfer the ‘house risk’ by paying a premium. You place the ‘mobile loss risk’ on your self. As simple as that!
A sound insurance programme should answer the “what ifs” in your life.
For example: What if you were faced with a major medical expense? (Think: Health & illness insurance).
What if you were unable to work for a long period of time due to a severe illness or accident? (Disability insurance and/or critical illness insurance)
What if your most important employee dropped dead? (Keyman insurance)
What if a fire destroyed many of your personal possessions? (Home owner’s insurance)
What if an employee stole data from your company (D&O insurance)
What if you were involved in an automobile accident? (Auto insurance)
What if you were to die tomorrow? Who will protect your income flow? (Life insurance)
So, if there are some more “what if” kind of questions, just see whether the risk can be measured. If it can be measured, it can be transferred. Transfer costs money (premium) and the benefits are — the insurer will pay all genuine claims. That’s all.
If you are confused about which unit-linked policy to buy, buy term insurance. Choose the cheapest one for a term that covers your working life. If you are 33 years of age and will work till your age of 55, you need a 22-year term plan. Check out Birla Sunlife, LIC, HDFC Life insurance, Kotak, SBI, ICICI Prudential, Max Life, Aviva, MetLife… doesn’t matter, choose the cheapest term insurance. If you are still not happy with leaving money in your bank account, go and get a unit-linked plan or a whole-life plan or an endowment plan or a money back plan!