Indemnification through Insurance

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For the same reasons that we should have an emergency fund, we must also take insurance covers. Both make us financially secure and prepare us to face unexpected difficulties in life. Even when we have our savings and investments in place to meet our financial goals, an unforeseen and unwanted incident can dent our financial position. Insurance provides us with the financial security to deal with such times. Through insurance, we transfer the cost of a potential loss to the insurance company in exchange for a premium. So just like an emergency fund, insurance is an indispensable part of our financial planning.

We can buy insurance policies to cover ourselves from a variety of risks. There are two broad types of insurance — Life Insurance and General Insurance.

Life insurance provides security by way of financial benefits to the dependents in case of the premature death or disability of an insured person. General insurance offers insurance policies to secure health, travel, vehicle, house, and many other assets. We need both types of insurance. Sometimes, insurance is mandated by the law. An example of this is motor insurance. As per the Motor Vehicle Act, at least third-party motor insurance is obligatory for every motor vehicle on the road, and there is a penalty for driving without motor insurance.

That said, let us find answers to some important questions that bother us when we think of getting insurance:

§ Which are the insurance covers we must take?

§ What should be the amount of insurance coverage?

§ How should we choose which policy to pick?

§ Which insurance company should we buy insurance from?

One security we all must have is that of medical or health insurance, which covers the significant medical expenses we may incur due to hospitalization, medical tests, surgeries, prolonged treatments, or doctor consultation fees. We should get a medical cover even if we are covered through our jobs unless the medical cover remains available to us even post-retirement. It is best to get medical insurance in the form of a “family floater” so that every member of the family is covered.

Typically, medical insurance should give coverage of Rs. 5–15 lakhs, depending on the costs of medical care where we live. It can be on the lower end of this range for smaller cities, but for bigger cities, with higher medical costs, the coverage we take must also be higher.

To decide on an appropriate insurance policy, we must know some features related to the policy that are highlighted below, and should be taken into account:

1. In a medical insurance policy, the premium can increase over the years, so we must be able to pick our policy with clarity on what the premium will be as we get older.

2. A medical insurance policy comes with several conditions, and we must be aware of what we are agreeing to when we take the policy. Some conditions to understand are:

§ Does the policy cover us for our pre-existing disease?

§ Does the policy entail any waiting period after which our claim will be settled?

§ What are the limits for expenses like room rent? Are there any other limits the policy has?

§ What, if any, are the exclusions in the policy?

§ Is there a co-pay clause in the policy, where we will be required to bear a part of the medical costs from our pockets?

§ What are the claim settlement conditions for day-care medical procedures like cataract surgery?

§ What costs will the policy cover pre-and post-hospitalization?

§ Can we also add a critical illness and personal accident cover to the policy, and what will be the cost of doing so?

§ Does the existing policy come with a top-up plan to increase the coverage taken after some years?

§ And last, but not least, what is the bonus the policy provides if no claim is made in a year? This is called the No Claims Bonus.

Life insurance is the second important insurance cover we must get if we are earning and have people who depend on our income. This insurance provides financial compensation to the dependents in case of death or disability of the insured member of the family. Some variants of life insurance policies are designed to offer financial compensation after retirement for a fixed period. The premium can either be a single sum paid when purchasing the life insurance policy, or it can be annual payments to the insurer. In exchange, the insurer promises to pay an assured sum to the dependents in the event of death, disability, or at a set time.

Most life insurance companies offer a variety of insurance plans like Term Insurance, Whole Life Insurance, Unit Linked Insurance, Endowment Plan, Money Back Plan, etc. However, it is advisable to go for Term Insurance, which is a plain vanilla insurance plan. It offers coverage for a specified term in return for an annual premium. The family of the insured gets a pre-decided sum in the event of the demise of the insured during the term of the plan, but nothing if the insured survives the term. Besides taking care of the financial well-being of the family of the insured, life insurance provides tax benefits as the amount of premium paid is deductible from the total taxable income with terms as defined under Section 80C of the Income Tax Act.

The coverage must be taken if and as soon as we have dependents, because the earlier we start, the cheaper it will be to get life insurance. As a thumb rule, we must take life insurance which is ten times our annual income. And in addition to this, we must take insurance large enough to cover any debt we take.

The third type of insurance we may choose to get is general insurance, which will compensate us for financial losses due to liabilities related to our house, travel, etc. Medical insurance is also a type of general insurance. If using the guidance above, we select the appropriate insurance from the ones available from various insurance companies, we can avail of financial protection for all our assets against loss, damage, theft, and other liabilities.

Insurance is a well-regulated sector in India, and there is healthy competition amongst various firms to sell their insurance policies. When buying insurance, it is important to carefully choose the insurance company from which we buy our policy. The company that has a record of settling 95–97% of the claims it receives from policyholders, and also with the fewest complaints against it should be the one to go for. Websites like policybazaar.com help make this decision. It makes sense to buy our insurance policies online as we do not have to pay any agent commission through this mode and save a substantial amount.

Final words: Keep insurance simple. Use it for financial security. Do not look at it as an investment.