Understanding the Finance Essential : Insurance

“Tragedy doesn’t make appointments, you have to be ready and armed when it arrives.”

Preparing for an unforeseeable future may seem impossible. However, when it comes to a priceless human life or going bankrupt post an unfortunate financial event, being prepared becomes a necessity. Preparedness doesn’t have to come at a heavy price, just some forethought and self-education. The fear of an unfortunate financial blow can be lifted off your shoulders by understanding the term ‘Insurance’ and signing up for an Insurance Policy.

What is meant by an Insurance?

Risk Management is a very broad term, but we can all agree Financial Risk Management matters most in the grand scheme of things. For Financial Risk Management, Insurance is the primary means of protection used to safeguard against uncertain and unpredictable loss, big or small. 

Insurance is a contract set in place usually in the form of a policy of reimbursement. In case a third party causes any damages both physically and/or financially, a financial institute or an insurance company provide you a protection policy as a precaution. There are many Insurance Policies to choose from depending upon what exactly you want to protect and insure.

What are the component charges applicable in an Insurance Policy?

An Insurance Policy is broken down into its policy limit and a premium.

• A Premium is defined as the monthly cost paid by the insurer. The premium is determined on the basis of the credit history of the insurer or more commonly known as his Creditworthiness.You can read in further detail about Creditworthiness here. An individual with say a poor medical history, would find it difficult to insure himself because he may have high medical costs as is. Insurance Policies may be unable to insure such an individual who may actually become a bigger financial risk for them v/s someone in tip notch health. Figuring out the correct premium price for you may require for you to some legal advice.

• Second comes the Policy Limit. This is the maximum amount as insurer has to pay in order to cover the stated loss under the policy. A maximum may be determined on the basis of a ‘term’, per loss or injury, or over the lifespan of the policy. Higher the limits, the higher premium that needs to be paid.

• Additionally, there is also a cost referred to as a Deductible. In a situation where the insurer may try to make insignificant financially voluminous claims, deductible costs help deter this malpractice. This amount is taken out of the insurers pocket. 

What are the various kinds of Insurance Policies?

Depending on your age, your employer and whether you have family depending on you, the Insurance Policy you need may vary. On the basis of these very factors, Insurance Policies have been classified. In total, there are four kinds of Insurance Policies.

Life Insurance

Having to live with the death of an individual can be difficult enough but having to manage without their soul financial support may be even more challenging. 

If you’re the soul earner and have family counting on you for most of their expenses, their life would cease to move forward if something were to happen to you. They might be able to manage for a few odd months at best. Therefore, it is in such circumstances, having a life insurance policy in your name would help your family fair the sad situation.

A Life Insurance Policy is designed to provide coverage for any such expenses that will not be met in your absence. These could include basic household expenses, utility bills or even an impending loan. Furthermore, such a policy would provide a family at loss, great comfort in such a morbid time by easing their financial hardships.

But the question remains, what would be a suitable cover amount as insurance? When trying to calculate a cover amount, you might have to consider ten years into the future such as mortgage, college fees for your children or even childcare. Taking these factors into account, it is recommended to take out a policy worth ten times your annual income. 

Life Insurance Policies are also further classified into 7 categories depending upon how long you pay for the services or their true purpose.

• Whole Life Policies : Provides you with a life-long coverage. In the morbid circumstance, of your untimely demise, your family will receive a certain sum of money. 

• Term Life Policies : It is the most basic form of life insurance covering you for a specific period of time. Again, your family is reimbursed a certain amount post your untimely death. You pay for term life policies for a time commonly referred to as a ‘term’. It is determined when you take out the policy. 

• Unified Linked Plans : Helping you attain the dual benefit of an investment along with insurance is the Unified Linked Plans. A part of your premium pays for the cover and the other part is invested into funds. The Insurance Company offering you insurance will suggest a set of funds you may invest in depending upon your risk capacity.

• Endowment Plans : Slightly differing from Unified Linked Plans, a part of your premium is kept for life cover and the remainder is invested by the Insurance Company you are insured with. If a claim is not made for the entire term, you are paid a maturity benefit. Therefore, you aren’t only insuring you future but saving some money for it as well.

• Money Back Life Insurance Policies : As the name of the policy suggests, a sum of money is paid back to the insurer periodically as a survival benefit. Over a term, you are reimbursed after regular intervals as long as you’re alive and kicking.

• Child Plan : Nothing could be of more importance than safeguarding your child’s future, especially if you are absent from their future. This plan helps to cover their education and marriage. You receive an annual payout or post the maturity of the plan which is till the child has reached adulthood.

• Retirement Plan : The Retirement plan protects you post a certain age (usually the retirement age of 60). All financial benefits incur after that age. The biggest advantage of this plan is that in case the insurer dies, the coverage amount is higher than the premium amount.

Health Insurance

We can all agree that in the case of a severe illness, having invaluable support could of great comfort. The coverage of any unprecedented medical or surgical expenses for an insured individual is what a Health Insurance is responsible for. Depending on the terms laid down in the insurers policy, either the individual pays out of his pocket and is reimbursed at a later date or the insurance company pays for the medical expenses directly.

You being in a top notch condition would help ensure you can get your health insured. However, a poor medical history would be significantly detrimental in getting your hands to a policy. Again, a legal advisor would help you in the best way possible to figure out what may suit your needs.

Disability Insurance

Not a single one of us in our worst nightmare would think we may become disabled. And that is why not many people would ever consider taking a Disability Insurance policy.

However, according to the statistical data in the UK, 3 out of 10 workers will become disabled before they reach retirement age. We believe a 30% chance of being disabled may be a percentage to reconsider a Disability Insurance.

Usually, your employer will have the avenues to provide you with a Disability Insurance. In the rare circumstance that your employer does not take out a policy in your name, you ought to take one with a private insurer. The best of the best policies ensure you are reimbursed 50-60% of your income. The Premium costs may vary depending on factors such as your age, style of living and medical history.

Auto Insurance

While you can trust your driving abilities, you never know who else is on the wheel, driving alongside you. One mistake on someone’s part may not only cause irreparable damage to one of your most valuable assets, put your family in imminent danger but scar you for life. This is exactly the situation where an Auto Insurance helps to protect you from.

In some nations, taking out an auto insurance policy is a legal requirement. And in the other  parts of the world where it isn’t as strict, it is highly recommended to take one out in your name. But in the end, deciding on what you give priority to, your financial safety is a decision fully up to you.

It might feel as if an insurance policy may be a costly affair that you may not really need. But precaution is always better than cure. While being hopeful of a good, healthy and safe life may seem to be a complete dream, protecting the future is what truly fulfills that dream.

Remember : It is a rather wise idea to engage the services of an experienced insurance broker, or financial advisor, before taking out a policy and it is imperative that you arrange for a policy that meets your needs to a tee.