Insurance is one of the ways you can mitigate and hedge against the risk of unforeseen losses. While risks lead to rewards, the downside is a possible loss. Losses can happen due to multiple reasons both on professional and personal fronts.
When you start a new venture by investing your savings, you have a chance to either make a profit or a loss by selling those goods. However, if you happen to lose the goods in a mishap you lose the chance to sell them at all. While a business risk is expected and can lead to higher profits, unexpected loss of goods can only lead to financial loss. Therefore, risks like serious damage to movable and immovable property, hospitalization and theft and similar calamities must be insured against.
Why is Insurance Important?
Insurance works like a cushion which helps you or your family bounce back financially after an unfortunate event. Whether it's business or family both can benefit immensely from insurance.
1. Distributes Large Risks
Insurance is a financial instrument. The risk of significant loss due to an event is borne by a large group of people exposed to the same possibility in a business. Thus, the losses are distributed over a large group making it bearable for each individual.
2. Provides Financial Stability
Without insurance, it will be extremely costly for businesses to bounce back after a major loss of inventory. Natural hazards, accidents, theft or burglary can affect the financial status of a business or a family. With Insurance compensating a large part of the losses businesses and families can bounce back rather easily.
3. Helps Economic Growth
Insurance companies pool a large amount of money. Part of this money can be invested to support investment activities by the government. Due to the safety concerns insurers only invest in Gilts or government securities. On the other hand, governments can raise funds easily from insurers for large public projects, which aid in economic growth.
4. Generates Long-Term Wealth
Insurance is often a long-term contract, especially life insurance. Life insurance plans can continue for more than three decades. Within this time they will collect a large amount of wealth, which returns to the investor if they survive. If not, the wealth goes to their family.
Need for Insurance
Insurance is an essential financial tool that helps in managing the unforeseen expenses smoothly without much hassle. However, this is not the only reason a person needs an insurance. Listed below are a few more reasons you need to buy an insurance:
1. Tax Benefits
Any payments received from life insurance plans are completely tax-free if your investments have met a few simple conditions. Most life insurance premium payments and investments are tax-deductible. Thus, insurance reduces your tax liability in the present and future.
2. Achieve Retirement Goals
Insurance plans like guaranteed savings plans and ULIPs are some of the best retirement saving options available. You can also use deferred annuity plans to safeguard your post-retirement income when you are close to retirement.
3. Stress-Free Life
With the right insurance plan, you can remain stress-free from unforeseen risks causing major financial damage. Insurance will help you and your families bounce back to your normal financial life quickly after a mishap. Insurance also keeps your long-term investments safe from sudden financial shocks caused by emergencies.
Types of Insurance
Insurance is a financial protection or mitigation tool against possible unforeseen hardships. The insurer assesses the possible hardship and pays in line with the agreed policy. Such an amount is termed “Sum Assured” or “Sum Insured” or “Insured Value” etc. It is imperative to know how insurance can make a positive impact on our lives.
Insurance is now a “must-have" rather than a “good-to-have" part of our financial plan. There are broadly 2 types of insurance and let us understand how either is relevant to you:
1. Life Insurance
Like any responsible person, you would have planned for a comfortable life basis your income and career projection. You and your family will be dreaming of basic things such as a good house and quality education for children. But what if you will not be around to fulfill those dreams and plans? Life insurance plans can help you plan for the financial future of your family even in your absence.
a) Child Insurance Plan
Child insurance plans like ULIP and savings plans gain an investment value with time. They also provide a life cover to the insured. These plans are perfect to invest in your child’s higher education and marriage goals.
b) Term Insurance Plan
Term life insurance is the pure form of life insurance. Term life cover only offers a death benefit for a limited period. The benefit of term insurance is that you can provide an adequate financial safety umbrella to your family at a nominal premium cost. Although the emotional loss can never be made up for, the loss of family income can be backed by life insurance. iSelect Smart360 Term Plan is an example of a term life insurance policy offered by Canara HSBC Life Insurance Company.
c) Health Insurance Plan
Health insurance offers financial support against sudden medical expenses and health emergencies. You can buy Mediclaim and critical illness health insurance plans. Mediclaim insurance can take care of medical bills and surgery expenses, whereas critical illness insurance offers a lump sum amount for life-threatening illnesses.
d) Unit Linked Insurance Plan (ULIP)
ULIPs are investment cum insurance plans that come with a dual benefit of life cover plus return on investment. In case of unfortunate demise of the policyholder, the nominee would receive the Sum Assured or else the policyholder would receive the fund value at the end of the policy term.
ULIPs allow partial withdrawals too. Amounts paid towards premium are deductible, from taxable income, under section 80C whereas all pay outs are exempt from tax under section 10(10D).
e) Endowment Plans
An endowment plan is designed as a safe investment strategy that also gives your family a financial cushion in case of your untimely demise. At the time of maturity, endowment plans give back the guaranteed amount + bonuses + guaranteed annual additions, if any. Most endowment policies give extended life cover even after the maturity value is paid out.
f) Pension Plans
The pension plans, including Pension4Life of Canara HSBC Bank of Commerce Life Insurance, give you a pension in the form of annuities. You can choose one of the following options after retirement for the income:
The pension starts as soon as you invest a lump sum amount.
Invest gradually and start a regular stream of income a few years later.
If you have recently retired and would like to invest a lumpsum amount to earn a pension, the immediate annuity suits you best. If you have some time to retire, a deferred annuity gives you time to invest over the years and build a corpus. You will get income streams called “annuities” till the end of your life.
2. Non-Life Insurance
Non-life insurance is also referred to as general insurance and covers any insurance that is outside the purview of life insurance. Motor insurance, property insurance, transit insurance, health insurance etc. fall under non-life insurance.
a) Auto Insurance
Auto insurance offers protection from accidental damages to your automobile. Auto insurance also includes cover for third-party damages, including bodily injury or property damage. Auto insurance is also a mandatory policy if you drive a vehicle on public roads.
b) Home Insurance
Home insurance is a useful insurance cover for homeowners. Home insurance can include insurance for the home structure (building) and the contents within it. The tenant’s home insurance will only include the cover for home contents and not the structure. Home insurance will cover you against property damage and loss of goods due to fire, theft, etc.
Importance of Life Insurance Policies
In case of the unfortunate early demise of the family’s sole breadwinner, the economic status of the family is jeopardized and they face financial hardships. Let alone the dreams and plans ahead, in some cases, even basic sustenance becomes a question mark.
Insurance is the best-known financial instrument that acts as a saviour for the family and as a tool for continued economic progress. The insurance cover is designed such that the amount substitutes the loss of income and ensures sufficient financial support for a reasonably long time.
Life insurance policies offer several benefits ranging from financial protection to wealth transfer. Using the right policies and terms of investments you can create long-term wealth with life insurance.
1. Peace of Mind
Adequate financial safety offered by life insurance plans can keep you free from stressing about your family’s future. Along with term insurance, you can also safeguard important goals for your child with child insurance plans.
2. Meet Long-Term Goals
Life insurance is a long-term investment which demands investment discipline and offers growth. Thus, you can start investing directly for long-term goals with appropriate life insurance plans. You can invest in safe plans or go for equity allocation with ULIPs as per your risk appetite.
3. Create Wealth
Life insurance plans like unit-linked insurance plans (ULIPs) help you invest in a mix of equity and debt funds. While the funds stay safe from any tax deductions the plan adds more bonus units if you invest for a longer period. Overall ULIPs can help you build a significant corpus over time.
4. Happy Retirement
The long-term nature and safe investment options make life insurance plans a good option for building a retirement corpus. After retirement, you can continue to invest the corpus in pension plans and draw a regular income from it.
5. Leave a Legacy
Whole life insurance plans help you build an asset that directly benefits your family after your demise. Since the plan continues till your natural demise or 100 years of age, it helps you leave a legacy for the next generations.
6. Tax Benefits
Life insurance plans are one of the best ways to save your annual income tax outflow. Also, the returns from life insurance plans are exempt from tax. Thus, life insurance investments also reduce your future tax spending.
Insurance is now an essential part of financial planning that gives both life protection and return on investment. If you plan well in advance and invest judiciously, you will generate wealth, create a corpus for retirement, earn a pension and also mitigate against financial losses thus giving you and your family complete peace of mind.
FAQs on Importance of Insurance
The right insurance policy for you would depend on the amount of coverage and policy term you seek. In the case of non-life insurance policies, factors such as the age of the asset and deductible will also affect your choice of insurance plan. For life insurance plans, your age and health will affect the premium cost of the plan.
If you own an automobile, third-party insurance coverage is mandatory before you can drive it on the road. However, you should consider comprehensive automobile insurance as third-party damage will not cover the cost of repair to your vehicle.