Should I Insure?
Before I answer the question, let us try and understand Risk. Risk is defined as the possibility of something bad happening. Every activity involves risk, however safe one may assume it to be. Given this fact, it is only prudent to think of Risk Management. Risk management does not ensure the complete elimination of risk, but it aims to minimize the damage in the unfortunate event of the occurrence of an undesirable event.
To illustrate further, let us take an example of a restaurant kitchen. A restaurant kitchen is highly exposed to the risk of a major fire. To manage this risk, it is desirable for the restaurant to put in place safe practices like: -
Keeping the column of gas cylinders away from the main cooking area.
Having a sufficient number of suitable fire extinguishers placed in the kitchen.
Put in place infrastructures like sprinklers and fire alarms.
Ensuring the staff wears cotton clothing.
Ensuring the staff wears cotton clothing.
Ensure frequent training of staff on fire drills.
These practices will not only ensure a reduction in the likelihood of risk of fire in the kitchen but also ensure that the damage caused is considerably reduced in the unfortunate event of a fire.
However, in spite of taking all the precautions, the restaurant cannot escape financial loss in the event of a breakout of fire.
In another instance, Raju (name changed) aged 30 was diagnosed with terminal pancreatic cancer. The only son to old-age parents, a husband and a doting father to a son. Everything was going well for the family until the day Raju was diagnosed with cancer. The young family had never thought of such an unfortunate event to ever strike them let alone plan for it. Being the only breadwinner of the family, they spent all their savings on treatment. They even borrowed money from near and dear ones including friends to meet the high cost of treatment of cancer. However, even after putting in all their resources, Raju could not be saved. He passed away leaving behind old parents, a young widow and a 1-year old son.
In both cases, the damage caused to the restaurant and the emotional loss to the family cannot be prevented. However, the financial loss thus caused could have been recovered, if the restaurant and in the second case, if the individual was appropriately insured. But the reality is, in hindsight, we are all wiser.
In India, the insurance penetration (ratio of premium underwritten to GDP) was only 3.49 % in the year 2016-17 as per the economic survey 2018 (https://timesofindia.indiatimes.com/business/india-business/insurance-penetration-in-india-has-risen-to-3-49-economic-survey-says/articleshow/62696220.cms). This is lower in comparison to other emerging economies of Asia like Malaysia (4.77%), Thailand (5.42%) and China (4.77%). India’s life insurance penetration is only 2.72% compared to the global average of 3.47%.
Why insurance is an important aspect of personal finance?
Insurance plays a vital role in an individual’s life. Just as castles cannot be built on thin air, similarly wealth creation through investing cannot be realized without the strong foundation of risk management and insurance.
Insurance acts as a safety net, a tool to minimize financial loss in the event of the occurrence of an undesired event. It not only makes good any financial loss but also provides peace of mind and thus better utilization of capital by investing in the right assets.
As an individual, a person is exposed to many risks. However, they can be broadly classified under two heads namely Risk to Health & Risk to Life. Risk to health can be further divided into Primary Health, Personal Accident & Critical Illness.
All the above can cause a major dent in one’s personal wealth. Hence, it is prudent to take appropriate insurance covers to mitigate or minimize financial loss in the event of the risks being played out. Let us examine them one by one.
Health Insurance
The rising cost of consultation for common diseases, hospital visits and medication are a cause for concern for many households in India. As per the article posted on moneycontrol.com, health cost in India is set to rise at double the inflation rate in 2018 (https://www.moneycontrol.com/news/business/economy/health-costs-to-be-double-the-inflation-rate-in-2018-survey-2700371.html). A visit to the hospital for even a small treatment can burn a hole in one’s pocket.
For the salaried, most of the time the employer provides the basic health cover as a group health policy for his employees. The government is also coming up with various insurance schemes to cover the low-income group and daily wage earners who find taking a health cover on their own unaffordable.
However, an individual’s health is his own responsibility. Irrespective of the cover provided by the employer, one should take a private health cover to protect self and family against any unexpected OPD or hospitalization expenses. This is because most of the time, the cover provided by the employer may not be sufficient enough and also the cover provided by the employer will only last till one remains employed with the same employer. In this uncertain world, where job security is not absolute, one may choose/be forced to leave the current employer. Also one may decide to leave the current employer for better opportunities elsewhere. The new company may or may not provide health cover. In some situations, there may be a considerable delay in joining the new employer, which exposes self and family to the high risk of no cover. Further, one may also decide to take a sabbatical or start own venture. Any unexpected hospitalization during these situations is certain to put huge financial stress on self and family.
While taking a private health cover, it is suggested to take a family floater policy, which is comparatively cheaper than an individual policy. In a family floater policy, the sum insured floats between all the members covered in the policy. The cost of health cover can be further reduced by opting for voluntary deductibles.
Personal Accident Insurance
As per the Report on Road Accidents in India 2016, published by Transport Research Wing under Ministry of Road Transport & Highways, Government of India, the country recorded at least 4,80,652 accidents in 2016, leading to 1,50,785 deaths. The number suggests that at least 413 people died every day in 1317 road accidents. ( Source: https://indianexpress.com/article/india/road-accidents-in-india-2016-17-deaths-on-roads-every-hour-chennai-and-delhi-most-dangerous-4837832/ )
An accident may lead to death or worst, it may lead to permanent total disablement leaving self incapable of any gainful employment in the future. If the accident leads to Permanent Total Disability, the loss is twofold. One not only has to burden the cost of treatment but also suffer the loss of future income to the family. Personal Accident Insurance protects against financial liability arising out of unexpected expenses in the unfortunate event of an accident. It also provides a lump sum payout in case of permanent total disablement to the extent of the sum insured which can be of great financial assistance to the family. Hence, Personal Accident Insurance is a must at least for the breadwinner of the family.
Critical Illness Insurance
Critical Illness Insurance is aimed at protecting self from the unforeseen expenses in the unfortunate event of contracting diseases which are terminal in nature. Diseases like heart attack, cancer, stroke, kidney failure, etc. not only deliver a devastating blow at an emotional level but also drain one’s financial resources.
There are over 30 million heart patients in India and at least 2 lakh heart surgeries are performed every year (https://food.ndtv.com/health/world-heart-day-2015-heart-disease-in-india-is-a-growing-concern-ansari-1224160). The cost of treatment of heart diseases can range anywhere between 5 to 20 lakhs depending on the type of treatment and hospital.
A critical illness cover protects the family by paying an upfront payment upon the diagnosis of disease and other benefits like providing cover for hospital expenses and in some cases provide a regular income as a percentage of the sum insured for some years. This not only helps the family cope up with the financial stress at the time of initial diagnosis and treatment but also provides a backup for loss of income.
Life Insurance
Risk to health may or may not happen, but death is certain. The only thing uncertain about death is time.
One must take life insurance if there are financial dependents. If no one is going to be financially affected by your absence, then life insurance need not be taken. Life insurance is like medicine, if it needs to be taken, it needs to be taken. There is no substitute for it.
The untimely death of the breadwinner of the family can be disastrous for the family. Hence, it is of utmost importance for the breadwinner of the family to take life insurance.
The right kind of life insurance is pure term cover, which provides a person with a high sum assured at the least cost. However, the catch here is that a term cover does not provide any benefits if the assured survives the term of the policy. But, in the event of death of the life assured, the dependent family gets the sum insured payout in a lump sum or monthly payout as opted for at the beginning of the policy. This not only ensures that dependents continue their existing lifestyle but also ensures all obligations or planned goals of the family are fulfilled, thereby reducing some pain on account of the loss of a dear one.
Care must be exercised while choosing the right amount of sum assured in term insurance. Ideally, the sum assured must be sufficient enough to provide for the dependent's future expenses in the breadwinner's absence and also cover any liabilities taken by the breadwinner.
Property and Household Insurance
Property insurance is taken to protect the property against the risk of fire, theft and some weather damage. This includes specialized forms of insurance such as Fire Insurance, earthquake insurance, flood insurance, boiler insurance, etc.
Home insurance or householder’s insurance provides cover against financial liabilities arising from the damage/ loss of your home or its contents due to natural or man-made reasons.
With the recent events of floods, cyclones and earthquakes in the country leading to large-scale destruction, no place can be guaranteed to be safe. The loss is huge in the case of natural calamities. In the face of such losses, insuring property and house by paying a small premium is the only saner thing to do.
To summarise, Insurance is a must if one wishes to create wealth. It is the first step in personal finance. Understanding the risk and its effective management will go a long way in ensuring financial stability for self and family.
Remember
Castles cannot be built on thin air.