Insurance is the simple process of being protected from a financial loss. It is considered to be a vital segment of your portfolio management done by wealth managers, primarily used to hedge against the risk of a contingent or uncertain loss, hence sidelining possible future risks. The loss might not be even easily expressed in financial terms, but the transaction is played out in such a way that a particular amount of periodical fees/charges is levied on the insured in return for a contract vouching for the insurer’s promise to compensate the loss. The contrast is called the insurance policy, which is received by the insured which details the terms of conditions and circumstances under which the insurer will compensate the insured if there is a loss.

For a little bit of history, insurance and other methods of transferring risks have been around from 1000-3000 BC, in ancient civilizations of Babylon, China, and India. Different kinds of insurance contracts and distribution of risk through deals and policies were made with merchants, money lenders, and sailors across the world between the trade routes. The sophisticated application has changed a lot in modern insurance, but the fundamental principles remain the same.

Let’s just start by busting a common myth among different sects of societies in different parts of the world, that if you earn a lot, or you have a lot of fixed assets, you don’t need insurance. This statement is completely false and financially unsound advice. Unless you have reached a liquidated asset accumulation of more than 10 crores, you can think of decreasing your cover, but until then not insuring yourself for your dependents is long-term foolishness.

Another one is that you are single and don’t have many dependents, hence you don’t need it. This is logical to some point, but again even if you’re single, you at least need life insurance to cover the costs of personal debts, medical bills, funeral costs. If you are uninsured, you may leave a legacy of unpaid expenses for your family or executor to deal with. 

One more that’s prevalent in India specifically is people buy insurance mainly for tax savings under Section 80CC, but this is a lack of vision and not understanding the value it might mature into for future financial goals. And a similar trend is seen in recent corporate employees, where they think they are young and healthy, so they either don’t need it or their employer-paid insurance cover is enough, and to some extent it does help, but one must research and factor in other variables/uncertainties that your company doesn’t do for you.

Now, talking about the basic types of insurance policies offered in India are as follows, (we will discuss them in detail in a further blog, so be on a lookout for it and subscribe to the newsletter for the update),

1. Life insurance
2. Motor insurance
3. Health insurance
4. Travel insurance
5. Property insurance
6. Liability insurance
7. Income protection insurance
8. Casualty insurance

These are the secondary ones, often divided under the two sections Life insurance and General Insurance. So, which of these are legally compulsory?

In India, only Motor Insurance is mandatory, under the Motor Vehicles Act, 1988, and so because of the number of road accidents happening all over the country. Policyholders should have at least ‘third-party liability motor insurance cover, which applies in the event of an accident caused by the vehicle owner or driver of the other vehicle. Also, vehicle insurance coverage may or may not cover damages caused by the owner, according to the policy.

The next frequently asked question is what happens to my policy if I don’t die unexpectedly. And the answer is term life insurance policies are created in a certain way where the policyholder pays a regular premium for the coverage. Once the policy lapses, or in other words, the policy expires and you outlive it, then all your payments to the insurance company are forfeited. This is a major reason for discomfort for most people who think they should get something in return for the money paid. But the problem is that people fail to understand that buying insurance policies is not an investment, but security in times of uncertainty. So the premiums from individuals who do not expire within the timeframe of their coverage allow the insurance companies to fulfill the payouts needed for other individuals that do pass away.

There is however one type of life insurance that does pay out a lump sum of the premium collected over the years with some percent interest/profit over it, on the event of death of the policyholder, or at maturity if he survives it, and is known as the endowment policy. This amount can then be used for various needs like funding your retirement, children’s marriage, repaying loans. It can be a Unit linked insurance plan (ULIP) or a non-ULIP.

Hence, endowment plans are ideal for people with a regular flow of income, like businessmen, and professionals of different areas of expertise from lawyers, engineers to doctors. These plans can be seen as a separate goal-based savings scheme and can be treated as an asset that will help in times of immediate need and even pay itself out at the end.

The last thing to point out is that, even though we have seen several reasons why insurance is essential to humans, there are people who don’t see its importance until it’s too late. The way insurances save people from sudden poverty and change in lifestyle due to financial, property loss, or loss of a loved one, is too huge in comparison to the periodic premium you have to pay. It’s always been a precautionary measure more than anything else, but as the value of money increases, to see it as an investment opportunity while it saves you from life’s uncertainties is just a wonderful bonus. It just might save your family from dealing with a financial crisis that can turn their life upside down.

Choose wisely and connect with our representatives at Money Yields who will be more than happy to offer you insurance policies that suit your needs and remind you of premium payments and other services.