How do you make sure you have enough insurance? – Advisor Forbes INDIA
There are enough opportunities in the market to help protect you and your loved ones from the financial burden of unforeseen emergencies. As a financial product, insurance should always be part of your overall portfolio and bring stability to your financial well-being.
But is your insurance sufficient? Here we take a look at the importance of insurance and how to make sure you are properly insured.
What is insurance?
Simply put, insurance is an arrangement in which you pay the insurance provider a specified amount of premium in return for guaranteed compensation for fixed loss, damage, illness or death, subject to terms and conditions.
As we all know, there are different types of insurance to cover a variety of aspects of our life. We can broadly divide insurance into two categories:
As the name suggests, life insurance is a contract, which provides for financial compensation in the event of disability or premature death. Some life insurance policies provide compensation after the end of the policy term. The basic principle here is to ensure the financial security of your family during your permanent absence due to death.
There are different types of life insurance such as term insurance, whole life insurance, endowment policy, unit-linked insurance plans (ULIP), and reimbursement policy, among others.
General insurance or non-life insurance
A general insurance policy essentially guarantees your overall financial well-being. This is a special insurance coverage that aims to protect your many assets, whether it is a vehicle (automobile insurance), your home (home insurance) or your health (health insurance). . General insurance compensates you for expenses incurred as a result of liabilities related to your property such as car, travel, home or health.
Understanding the risk of being underinsured
As more and more people insure for the things they care for, underinsurance remains a major problem for our country.
There are several reasons for the low penetration of insurance, in particular non-life insurance in the country. Misplaced information and lack of awareness of these essential financial products have been identified as the main factors responsible for such low penetration. In addition, people believe that by purchasing substandard insurance products, they are getting enough insurance.
However, once they face an emergency and file a claim, the situation is quickly reversed. In these times, being underinsured is almost the same as being uninsured.
What does it mean to be underinsured?
As the name suggests, underinsurance is the lack of sufficient coverage offered by your insurance policy. You can underinsure in two ways:
Lower sum insured: In this scenario, even if you have the right insurance, you may have opted for a lower sum insured. This may be due to a poor estimate of future needs or simply a decrease in the amount of the premium. The biggest risk with a low insured amount is that you won’t have access to enough funds in case of critical need. Let’s take an example :
You buy a health insurance policy with an insured sum of 5 lakh INR. Under the current circumstances, you think the amount is sufficient to cover all of your health costs. However, one aspect that you may not have taken into account is inflation. Medical inflation is on average around 12 to 15% per year.
So, in a few years, 5 lakh INR will not have the same value as it is today, and a similar treatment could cost you much more. Additionally, the medical procedure and treatment technology is changing rapidly and could also result in a higher cost for the same treatment. It should also be understood that as age increases your chances of contracting a lifestyle-related disease also increase and higher coverage may not be available at that time from your insurer due to the same.
Even if it is available it will come at a much higher premium. Therefore, when there is an emergency, you find yourself under a financial burden. Why? Not sufficiently insured. Results? Tap into your savings and thwart the goal of purchasing an insurance policy.
Take another example in the case of home insurance. If for a set of your electronic devices worth 100,000 INR you have taken out insurance for 75,000 INR, it is assumed that you are taking out self-insurance for 25,000 INR.
Here, if you suffer a loss of INR 50,000 due to theft of some of your devices, the insurer will not pay you the full INR 50,000 even if you have taken out insurance for INR 75,000 but will only pay you. 75% of the loss amounting to INR 37,500 due to underinsurance.
Very often consumers do not understand this and tend to be underinsured to save on premiums, but do not realize the impact on claims settlement due to underinsurance. A similar example of underinsurance will also apply to insurance of stocks and stocks held by traders and traders.
Not enough coverage: In this scenario, the insurance policy does not provide you with sufficient financial protection or simply does not cover any illnesses or treatments that you may need in the future. Let’s see another example:
You are purchasing a comprehensive health insurance policy that offers considerable INR 20 lakh coverage against your medical emergencies. It is fair to assume that you are sufficiently covered against any illness or disease with such a large sum of insurance. However, due to a lack of proper knowledge, you did not read the fine print that the policy does not cover serious illnesses such as cancer at the time of purchase.
Now, in an unfortunate event of contracting such a serious illness in the future, having such a sum insured will be virtually useless. And again, you will have to pay the processing fee out of pocket.
Likewise, not all home insurance policies provide protection against losses that occur due to earthquakes and floods. Thus, claims related to the destruction of your home due to an earthquake will not result in any claim payment by the insurer.
So what do these examples tell us?
It is therefore essential to be well read and knowledgeable about insurance. It is not enough to opt for extensive coverage. You can always find yourself underinsured and vulnerable to a myriad of financial problems. To avoid such situations, you should carefully review the coverages and benefits before purchasing an insurance policy.
How do you make sure you are properly insured?
- Analyze your needs diligently: When taking out an insurance contract, you must systematically assess your needs and then take out the coverage in question. While we focused primarily on health insurance in the example above, the same principles hold true for auto or home insurance, albeit with their respective terms and conditions. You must remember to take inflation and other plausible unforeseen expenses into account when purchasing coverage.
- Choose an adequate sum insured: When purchasing an insurance policy, you need to make sure that you choose an appropriate amount of insurance that will cover your present and future needs. You may have to pay a higher premium. However, given the uncertainties of life, it is worth it. Ultimately, you shouldn’t be facing a costly financial emergency just because of a lack of adequate coverage.
- Carefully read and understand the terms and conditions of the policy: To avoid the risk of underinsurance, do not miss the smallest details of the chosen insurance coverage, including exclusions. So, in the case of health insurance, look for covered critical illnesses, lifestyle requirements, and other similar clauses when purchasing coverage. For auto insurance, see what additional damage is covered and what exclusions the policy has for normal wear and tear on the vehicle.
- Seek professional help if needed: We live in a world of complex financial products, and it is only natural to be overwhelmed by the number of products, let alone the respective terms and conditions. In such cases, do not hesitate to seek professional help to protect yourself and your loved ones. Moreover, it will also prevent you from getting incomplete information from unreliable sources and making a totally wrong decision about your insurance needs.
- Premium payment conditions: Your financial ability to pay the premium amount is essential when deciding on the extent of the insurance coverage you need. In the case of health insurance, not everyone can pay the premium for INR 20 lakh coverage. A simple way to calculate sufficient coverage is to consider 2% of your annual income. For example, if you earn 8 lakh INR per year, you can pay an amount of 16,000 INR per year which will provide you with sufficient coverage at present.
- Don’t think of insurance just as an investment tool: While it is true that purchasing insurance coverage helps you with your tax and financial planning, you should not view it only as an investment tool. Your insurance needs should be separate from your investment needs. By separating investments from insurance, you can benefit from more flexibility in your investment depending on your financial needs, liquidity and risk appetite.
Life is uncertain and you must prepare for the unexpected. Currently, there are enough products on the market that will help you meet your financial needs and goals. However, when purchasing, you need to do your due diligence to understand your financial needs and the product you are about to purchase.
You should think of insurance as a financial product that provides peace of mind and a sense of security. Insurance needs change with changes in income, expenses, age, lifestyle, debt, inflation, etc., and you need to consider all of these changes to ensure you are properly covered.