You need to ensure first that there is no unplanned outflow of funds due to exigencies, that may derail the wealth-creation journey.
It is said that one needn’t born wealthy to be a wealthy man, but wealth may be built by working consistently and managing well whatever money one has. Wealth building is a long-term investment process where you need to save as much as you can and start a business successfully, or invest regularly to acquire part ownership of successful businesses by taking part in their equity capital.
But during the long-term investment journey towards wealth creation, you need to ensure first that there is no unplanned outflow of funds due to exigencies, that may derail the wealth-creation journey.
For that you have to make some planned expenditure to eliminate or minimise the chances of any unplanned outgo of unknown amount due to some perils. It may be done by transferring the risks that you are not capable to handle to an organisation that has adequate financial strength and experience of handling the risks for some fee.
The risks that may be transferred include life risk, health risk, disability risk, risk of getting critically ill, risk of accident for self and liability towards third party, risk of loss to property due to natural calamities like earth quake, storm, flood, bush fire etc or due to man-made causes like fire, theft, burglary etc.
Occurrence of events leading to such risks are uncertain and in case of unfortunate happening, the quantum of losses can’t also be predicted and may leave the affected person and/or his/her family bankrupt. So, to protect erosion of wealth, it is necessary to eliminate the unpredictability by transferring the risks to insurance companies by paying premium, which is predictable and small to manage.
So, you may take into account the premium to be paid in your financial planning and make investments accordingly to prevent your wealth-creation journey from getting derailed due to some unpredictable outgo of funds of uncertain amount.
You may take insurance to cover the following risks:
Life Risk: Investments may come to a standstill and even result into outflow of money saved in case of early death of the breadwinner. To ensure that life goals of dependents remain unaffected and their standard of living remains the same, it is important for the earning member of the family to take adequate life insurance.
Health Risk: Serious health condition would not only result into huge cost of treatment, but may also result in to loss of earning. So, it is important to take health insurance cover for all the members to plug the outflow of funds during hospitalisation as well as cover for critical illness to compensate loss of income during such illness.
Disability Risk: Inability to earn due to disability may also derail the wealth-creation process. So, along with life and health risk, insurance has to be taken to cover disability risk.
General Risks: General risks may include losses to properties due to fire, burglary, theft, storm, flooding, car accident etc. Apart from loss of property, such risks may endanger the life of a third person as well, resulting into unpredictable and huge penalty. So, it is also important to take covers like motor insurance, fire insurance, home insurance and insurance on properties, appliances, activities that may – apart from loss to properties – may also cause bodily harm to others.