By Sunil Dhawan
Risk is omnipresent. All of us, at some point of time, would have taken the so-called calculated risk in our routine chores. However, for most of us, when it comes to one's own life, assets and life goals, such risk-taking approach takes the back seat. One needs to take calculated risks to protect against unforeseen risks to one's life, health and property. And this is best met through the risk management tool called insurance. Let's take a look at a few major risks in life and the ways to manage them through appropriate insurance covers.
Risk involved: Escalating medical costs
Managing risk: Through health insurance
One of the few initial steps in the financial planning process is to guard against medical expenses. Hospitalisation due to illness, accident or a serious ailment may strike anyone in the family and at any point of time. Not just mentally, it could also be a huge financial drain for the family in meeting hospital costs. A health insurance policy could be the answer in meeting such medical costs. In the absence of a health insurance plan, one may not only have to dip into one's savings, thereby jeopardising long-term goals, but may also have to resort to borrowings from friends or relatives.
Do not, therefore, ignore the importance and role of a health insurance plan. By paying a small premium each year, the risk of incurring a huge medial cost is contained. With healthcare costs rising at more than 15 per cent a year, having an adequate coverage for self and family members helps. Remember, it should no longer be a choice, but a necessity in view of the escalating cost of medical treatment.
Risk involved: Dying early (untimely death)
Managing risk: Through term insurance
The financial planning process for an individual begins by identifying the various goals at different stages of life. To achieve them one has to be alive and keep funding them till they arrive. However, the risk of an early death exits, which could derail the entire investment process. The surviving members of the family, in addition to the mental trauma, could also suffer from loss of income, thereby making long-term gaols vulnerable to the circumstances. A pure term insurance policy is apt in meeting such a kind of risk arising out of untimely death. It is a pure risk cover plan with the premium being paid only to cover the risk of mortality (risk of death). Term plans are high-cover, low-premium kind of products.
Do not therefore ignore the importance and role of term plans. Get it if you have family members financially dependant on you. As a thumb rule, get a life cover (sum assured) of at least seven times of your annual income. Add on the cost of meeting long-term goals to further take care of the risks. Insure yourself till the time you expect to have financial dependants. Online purchase of term plans comes at much reduced cost. Hence make full use of it.
Risk involved: Loss of earning capacity
Managing risk: Through personal accident and disability cover
An accident can be fatal enough to leave someone disabled. To a great extent, this may reduce the earning potential of the individual. While a health insurance policy will take care of hospital bills, in case of an accident, an individual personal accident policy (IPAP) meets the need for replacing the loss of income.
Do not, therefore, ignore the importance and role of individual personal accident policies (IPAP) which typically include four contingencies that may arise from an accident: death, permanent total disability, permanent partial disability, and temporary total disability. The features of an IPAP may vary across insurers, but try opting for a comprehensive coverage of all the four contingencies rather than covering some of them. In order to work as a tool for income replacement, in case of temporary total disability, such a cover provides weekly payouts at one per cent of the sum assured, subject to a ceiling of a certain amount, say Rs 6,000-Rs 10,000, for a specific period of 104 weeks. There is also a cap for the overall cover under IPAP, which can be 60-72 times of one's monthly salary, depending on the policy.
Risk involved: Damage to one's own vehicle
Managing risk: Through a motor 'package policy'
In a 'liability only' policy, in case of an accident, the legal liability towards third parties is covered. Also referred to as 'third-party' policy, it is mandated by law not to drive a vehicle without it. But any damage to one's own vehicle can be covered only through a motor 'package policy', which covers loss or damage to the vehicle insured apart from providing third-party liability coverage.
Also referred to as 'own damage' policy, the comprehensive package plan provides coverage to self and the vehicle against a number of risks arising out of an accident or theft. It also covers death of the driver or passengers inside the vehicle in the event of an accident. The plain vanilla motor insurance has seen a makeover in recent times. One may attach certain add-ons to the motor policy at an extra premium to get additional benefits at the time of making a claim, such as zero depreciation, engine protection, return to invoice, protection of no-claim bonus, roadside assistance, amongst others.
Risk involved: Damage to one's own dwelling
Managing risk: Through a household insurance policy
Home is where the heart is, goes an old saying. One spends so much time and money for living a comfortable life. But, when it comes to protecting one's house from the perils of theft, damage and fire, the inclination to insure it is the least. The risk to one's property is on two major counts - risk to the structure (arising out of fire, earthquake, flood etc) and secondly, the risk of losing the household contents.
Buying a home insurance policy keeps such worries at bay, as it allows insuring the structure (of the building) as well as contents separately or insuring both. The coverage for insuring only the structure is up to 10 years and one may pay the premium annually or as lump sum after getting a discount. The contents of the valuable personal property may include furniture, clothing, music system, computer equipment, jewellery and more. The insurance premium is usually less than one per cent of the value and cost of the structure and contents of the house.
Source: Economic Times
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