How insurance can help you tide over financial insecurities

April 25, 2020 11:45 AM

Being insured can help a person in multiple aspects of life like Financial Security, Debt Management and Family Protection, amongst others, against unanticipated events.

insurance, Financial Security, Debt Management, Family Protection, financial insecurities, Financial Security, Manage Risks, manage risk, debt, life goals, financial goals, lockdown, COVID-19, Insurance is a tool to reduce the financial impact of unforeseen events and to create financial security.

The importance of insurance to reduce unforeseen financial impact and create financial security holds true in this current situation of financial turmoil, lockdown and COVID-19 scare. Being insured can help a person in multiple aspects of life like Financial Security, Debt Management and Family Protection, amongst others, against unanticipated events.

Over the years, the need for insurance has evolved from protection to risk management. While insurance is a mechanism of risk transfer and sharing by pooling of risks and funds among a group of individuals who are exposed to similar kinds of risks, risk management is a holistic approach for an individual’s insurance needs. Almost anything can be insured but certain things absolutely need to be adequately secured using proper risk management tools. This typically includes life, health, and property. Insurance is a tool to reduce the financial impact of unforeseen events and to create financial security. Insurance is a critical risk management tool to secure the present and future lifestyle of a family. Providing protection and mitigating risk is the simple motive of insurance.

Some of the reasons that elaborate the significance of insurance are given below:

Financial Security & Stability

It is critical to be fully prepared to deal with contingencies in life. Life insurance protects the family and its financial needs, in case of an unfortunate and/or untimely demise. Some insurance policies may also provide a maturity benefit, resulting in financial stability of the family. To manage a family’s financial needs, insurance products such as traditional term places, whole life insurance plans and unit linked insurance plans can be considered with an insurance cover equal to the discounted future value of all expenses and financial obligations.

As a generic thumb rule, the sum insured should be in multiples of annual income depending on the age of the insured. For example, individuals between 20 and 30 years of age should have a life insurance cover worth 20 times their annual income, while those above 40 years of age should have life insurance coverage 10-15 times their annual income. The other approach is premium as a percentage of income where at least 6% of the annual income plus an additional 1% for each dependent should be spent on life insurance premium.

Manage Risks

Insurance is an effective risk management tool. It can be used to plan for various risks such as illness, accidents, untimely demise through products like health insurance, personal accident cover, life insurance. The amount of cover in normal circumstances depends on the financial position of the individual. Similarly, home insurance covers your house against losses arising out of fire, weather conditions, theft, etc. This also includes standalone policies like fire insurance, earthquake insurance, flood insurance, boiler insurance to protect your assets.

Dealing with Debt

Life Insurance products can be used to deal with financial liabilities during a crisis. Any outstanding debt-a home loan, auto loan, personal loan or a loan on credit cards can be taken care of if all the liabilities are insured. Several loans these days come with an inbuilt insurance product that covers only that loan. However, this option can be skipped if you are already sufficiently covered and the proof of this can be shared with the lender.

Helps achieve financial goals

Some life insurance products such as traditional and endowment plans help you stay invested for the long term. This can help to achieve long-term financial goals such as buying a house or planning for the education or marriage of children.

Protecting your assets from unwanted claims

This is possible under the Married Women’s Property Act, 1874. In case of the demise of the insured, there is a risk of creditors laying a claim on his assets. In such a situation, even the sum assured can be claimed by the creditors or attached by the court for repayment of debt. This can be avoided by simply buying a life insurance policy under the Married Women’s Property Act, 1874. The process is same as for a normal life insurance. The only difference is that the applicant has to select “Policy under MWP Act 1874” while filling up the policy proposal form.

Protect your business

Some insurance policies also take care of business liabilities. Much like a limited liability company isolates business activities; limited liability insurance protects the business investments of each partner in a business. It is the responsibility of each partner to individually purchase this type of insurance policy.

Conclusion

The best time to start thinking about insurance is as soon as possible. Getting coverage early will get you the best possible plan for the lowest possible premium. Choose the cover and premium that best suits your needs and budget and you will be able to adjust the level of cover over time to suit your changing lifestyle and goals.

(By Sameer Kaul, CEO & MD of TrustPlutus Wealth Managers)

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