Insurance forms a major part of risk management, which involves assessing and quantifying risks, then controlling or reducing them. How can we reduce risk? By being prepared for eventualities with adequate insurance.
Risk management also forms the foundation of a good financial plan. Only after a strong foundation stone has been laid, can we move ahead and build further on the financial plan.
Think beyond life insurance
As author and risk-management expert Charles Robert Tremper aptly said, "The first step in the risk management process is to acknowledge the reality of risk." Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.
Many people still do not believe in buying must-have general insurances like health insurance, home insurance, motor insurance or disability insurance. Life insurance is the only form of insurance they have.
This is also true for working individuals. Often, their health insurance is provided by the company. They rarely consider what will happen when they leave that company. Even if the other organisation covers their basic insurance, what after they retire?
Get adequate health insurance as soon as possible; as it will be increasingly difficult to get it as you age.
With regards to other forms of insurance, particularly home insurance, many argue that theft or other calamity is not going to happen to them. But you never know what is lurking around the next corner. Home insurance comes at a low cost and it covers your home and all articles in it. Remember, it's imperative to have all adequate basic insurances in place.
Get adequate cover
A majority of those who have their life insurance and health insurance in place are under insured. Here's what to consider to prevent being under-insured.
- Life insurance: The factors to be considered while buying your life insurance are: inflation, age, household expenses, one-time costs [like funeral expenses or outstanding debts] and future big expenses like your child's education and marriage.
- Health insurance: When buying health insurance, opt for maximum cover and individual policies rather than floater plans. This is because in floater plans the entire cover can get exhausted just by one member leaving others without a health cover. Disability insurance should also be considered along with health insurance. Once again, opt for maximum cover. It is vital that maximum possible factors be kept in mind while purchasing all kinds of insurance and get an adequate cover.
Avoid being over-insured
There are individuals who buy several policies in the name of savings. This is especially true of individuals who bought their cover back when most schemes guaranteed returns.
But it makes more sense to buy adequate insurance, and then use the balance amount, which you would have otherwise shelled out as premium, to invest in good investment avenues and start building a corpus. This way, you have a chance to earn much more interest on your money.
Get the correct cover
Let me take the example of life insurance. Unit-Linked Insurance Plans [ULIPs] sell like hot cakes. However, just as you cannot mix your drinks, you cannot mix products like insurance—a pure risk management tool—and investment—an instrument to reach your money goals. ULIPs are expensive plans; opt for term plans instead. They offer pure protection, are cheaper and give adequate cover for a small premium.
Same goes for health insurance; check factors like diseases covered, hospital network cover, claim settlement process, co-payment portion if any and treatment of existing diseases. Also avoid buying unnecessary policies, for instance buying a life insurance policy for an elderly person where mediclaim is appropriate. Buy insurance that is right for you and not which the agent wants you to buy.
Do adequate research
Shop around and look for the right company. Consider factors such as claim settlement, back-end services, and past records before finalising on an insurance company. Do not just buy an insurance plan because it is cheap. Research well even after you finalise a plan.
Read the offer document
Insurance advertisements urge you to read the offer document carefully. How many of us actually do? Reading the offer document will solve many of your queries such as expenses you will have to bear, grace period, or diseases covered and network hospitals.
Like in matters of health and finances, regular check-ups are required when it comes to insurance as well. Recalculation of insurance requirements is a must as life is dynamic and circumstances keep changing. So, from time-to-time, check if you are adequately covered. Remember, all policies come at a price; buy them with great caution and only as per your requirements.
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