Transfer your risk using insurance

If your car had no brakes, most of you would prefer not to risk driving it. Brakes are those safety nets that allow us to peacefully go about our business without being overly worried about what would happen to our financial commitments (which we would have ordinarily honoured in our life time) to our dependents, if we were to pass away unexpectedly.

Since the risk one faces is unlikely to go away, we need to work towards managing or containing the risk so that in the event of a contingency, our lives can proceed with the least possible damage. One of the most effective ways to manage risk is to work out how much you can brave and then outsource the remaining part to an insurance company.

Insurance is the most critical decision to be made in money management. It performs the role of reducing the unpredictability of day-to-day life. It provides us with the financial strength of dealing with unforeseen situations. It acts as a shield to our earning capacity. Buying insurance refers to the process of transfer of risk to the insurer.

Few commonly bought insurance plans are:

Term Plan - It is the most appropriate product for pure risk cover.
 
Whole Life Plan - It’s ideal for paying duties and estate taxes payable by the beneficiaries at the time of death of life assured

Endowment plan - It offers life cover for the person insured and investments. It is most widely used for meeting the education needs of children

Unit linked policies- These provide risk cover and also has an investment component. They offer choice of different asset allocation.

Annuities- It provides lifelong payments to annuitants till they are alive (something like pension). These are normally taken to supplement income during retirement

Health insurance: It ensures that expenses due to hospitalisation (hospital stay as well as medical costs) are compensated to a certain extent. It becomes costlier and at times difficult to get as one gets older.

Motor insurance- It protects from financial costs incurred because of damage to car due to traffic collisions and other reasons and also car theft to a certain extent. The kind of insurance needed and the amount of cover are the key decisions to be taken.

Taking an insurance plan is not mandatory and therefore, it needs to be bought if there’s a need. For example, an individual with no dependents need not take a life cover. In addition, people who have enough reserves for the dependents to fall back upon, need not take additional cover.

Calculating the right amount of risk cover on a client’s life is an exercise in customisation. It involves taking stock of one’s assets (excluding those deployed for personal use), one’s goals and its priorities, one’s liabilities, one’s lifestyle and the kind of job one does. Also, it involves out-guessing the probabilities of an occurrence at some point in time. Too much of insurance could dent the current cash flows and too little might end up looking inadequate at the time of happening of the event, against which one is trying to safeguard.

Also, planning for a rainy day or contingencies is an extension of risk-cover. At least four to five months of expense need to be set aside for meeting any emergency needs. Keeping money aside for any emergency ensures that the other short, medium and long-term goals are not jeopardized.

The writer is a certified financial planner practitioner, founder partner of Srujan Financial Advisers