During the last four months, people in India have fought a pandemic, withstood a cyclone and faced one of the greatest economic challenges of our time and, yet, we’re still here. It only goes to prove how resilient we are as a country and as a people.
It also goes to prove that, whether directly or indirectly, we are constantly exposed to risk; risk to our property, our livelihood or, at times, even our lives. These risks are terrible in and of themselves but are also inevitably tied to financial imbalance. Though it is impossible to prevent such externalities from occurring, we can choose to protect ourselves and our loved ones from unwanted dire financial consequences. One of the ways in which this can be done is insurance.
If you’ve read the 7 financial lessons lockdown taught us, you probably now understand how we can broadly protect ourselves with insurance. Let’s start getting into the nitty-gritty of this.
To put it in simple terms, insurance is a contract where an entity (the insured) receives financial protection from an insurance company (the insurer) in the event of a contingency (generally negative in connotation). The insurer promises to compensate for the losses that result from a specified event. It is a simple hedge against the risk of financial loss from damage.
It is easier to think of the main purpose of insurance as an investment and a means of maintaining financial safety. Though we will eventually get into the different types of insurance and their respective breakdowns, today we’ll focus more on why you should have insurance coverage at all:
1) Financial security: No matter what job you do or your income, an unexpected event will put a dent in your finances; sometimes, such unforeseen events can financially cripple us for years. It is important to secure yourself and your assets against these unexpected events with insurance.
2) Risk transfer: The entire Insurance industry works on the principle of ‘transfer of risk’. The insured intends to transfer the risk to the insurer of a specified contingency in exchange for monetary compensation. Homes get insured against various damages, cars get insured against accidents, and people get insured against sickness or even death. You’re basically transferring the risk of these events to your insurer.
3) Future goals: We go through various milestones in our lives and we certainly should celebrate them. Very often, we don’t get to because we let ad hoc expenses guide our finances rather than plans. Insurance helps you plan your future finances better since you know that you won’t have to spend money out of pocket to cover your expenses in case there are unforeseen events.
4) Saves your money: Insurance premiums (we’ll get into these in-depth eventually but all you need to know right now is that it’s what you pay for your insurance) can be a bit hefty. That being said, insurance premiums cost way less than the lump sum of money you would suddenly have to pay up in case of an emergency, whether it’s for a broken arm or a burnt down house. Getting insurance is like buying a winter coat in the summer; things cost less when you don’t need them immediately.
5) Monetary benefits: Insurance can provide long term savings as well as tax benefits if you do it right. The longer tenure of certain insurance schemes as well as income-generating insurance plans like Unit Linked Insurance Plans (ULIPs) can lead to substantial monetary growth of your investments as well as provide you with insurance cover. The tax benefits under sections of the Income Tax Act were introduced as incentives to promote individuals to take up insurance policies.
6) Government regulations: A lot of times you should get insurance because you just have to. Let’s clarify; the government has always promoted insurance as an industry and has taken measures to educate people far and wide about the benefits of insurance to increase adoption. Though the insurance industry has grown from one initial company to a total of 57 public and private companies that provide insurance products today, a mere 25% of the country’s population holds any kind of insurance. As such, the government put into play some insurance policies which are mandatory in nature to avoid unnecessary hassles. One of these examples is motor insurance which is covered under the Motor Insurance Act, 1988.
Despite the wide availability of insurance products, India has massively remained a country that is either not informed about insurance options or has chosen not to opt for them. Whatever the reasons, this is now changing. Coming face to face with multiple uncertainties in a short span of time is driving home the need for stability and security for many people.
Just in case you weren’t one of them, we’ve covered some of the major reasons why insurance is a must and we hope you’re convinced because we’ll be talking about this a little more later.