A casual conversation with a 20 something new to the employment world turned a wee bit serious because of her misplaced beliefs. I was pleased to hear her plans for her life, which went all the way till she settled into retirement. Everything that she said had a tinge of materialism – the car that she wanted to buy in a year, a house by the time she got married, a vacation home in Goa, foreign vacations every year and some money for her retirement. She had ticked a lot of boxes that a financial planner would have wanted.

But, almost everything that she said assumed she is infallible—there was no backup plan and there was no thought about risks to life, health or even for that matter her ability to keep a job in times of uncertainty. It did not take me long to puncture some of her enthusiasm with a simple reference to the fact that disasters don’t usually announce their arrival. They strike unnoticed and often with dire consequences. What if she met with an accident on her way home in the cab, which is what she usually does and was rendered to being in the bed for, say, the next two months? What if serious illness struck her? What if she died young?

Risk transfer

Insurance is chiefly a risk management tool and is a must for us because of uncertain future adversities. Accidents, illnesses and disability are facts of life which can be extremely devastating—both emotionally and financially. Imagine a situation when your financial dependents, your near and dear ones have to fend for themselves if you did not wake up one fine day? It is a situation you would not want them to be in ever. Life insurance pays out in the event of your death by giving them financial security. Similarly, health insurance pays out when you are sick. Transferring risks with financial impact to insurance products is a smart way to protect your financial lives.

Many people are simply not prepared for the financial consequences that can follow unexpected events. If, for instance, a working couple with two children were suddenly reduced to one income, because of the demise of one of them or face a situation when one of them is detected with a critical illness, they would have to make serious adjustments in lifestyle and financial goals. What if this loss is for the long-term? The impact can leave a deep financial hole, which can alter the course of the family’s financial health and in some cases abruptly end some goals in life.

How much insurance?

Most people, like the girl I met, are so focused on earning their pay and building their wealth that they don't take the next step of protecting it. Insurance is the most simple, yet complicated financial tool that people do not look into or do so for all the wrong reasons. Insurance, both health and life are tax efficient products and should not be bought with savings on tax as the sole incentive. Ideally, come what may, one must buy insurance for protection first and everything else later. And it is important to strike a balance between being under-insured and over-insured.

Basically, insurance should be taken so that one can ride out the bad times without having to worry too much about how they will manage their monthly cash flows. Things are not as bad as they were with insurance a decade ago, especially in terms of products or features. The old saying; insurance is sold and not bought, is changing slowly, with many individuals realising the need to protect their dependents from financial shocks.

Determining precisely how much life insurance you need is a complicated question. The amount of insurance cover you need is a function of your age, income, assets and financial liabilities. At the same time, the assessment of insurance needs shouldn’t be a one-time exercise, it should be dynamic and responsive as life itself is. Your insurance policies should ensure financial protection for your family in the event of a calamity.

The quantum of both health and life insurance cover will vary depending on the individual in question. I had to tell the girl that at her age and in her situation she definitely needed health insurance, and life insurance is something that should come into play as and when she has some financial liabilities. Likewise, it is important to understand that needs change at different phases of life and one should increase or decrease life cover proportionately. Everyone's needs are different and it is important to have a good risk protection strategy in place.

At the same time, do not put off taking insurance till such time that your health is in a poor state or you are too old for an insurer to offer you an insurance policy. The later you take insurance, the more it costs you. So, follow a few thumb rules, like taking a health insurance as soon as you are employed and life insurance as soon as you get married. More importantly, revisit your insurance needs once ever few years to increase the cover if possible or take additional insurance.

nk@outlookindia.com