Every asset has an economic value and it provides some benefit for a certain period of time. After its life-time, the asset needs to be replaced with a substitute. However, there can be an unfortunate event like an accident which may destroy the asset (including human) early or make it incapable of generating any income. To reduce the financial effect of such adverse situations, Insurance comes into the picture. So, the simple rule is: all those things which will cause you economic loss to replace or reinstate, should be insured.
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But practically it’s not possible because if you try to insure everything under this sun, you will be left with no money for your living expenses & goals. So one should consider two things before taking any insurance – probability of the event & financial impact. It can be simply understood by this grid.
- A (High Probability, High Financial Impact) type should be covered without any second thought – Ex health insurance & motor insurance.
- B (Low Probability, High Financial Impact) type can have significant financial impact so should be considering after looking at personal situations & assets Ex Term Insurance, Accidental Insurance & Critical Care Insurance.
- C (High Probability, Low Financial Impact) in this case decision should be made that risk should be retained Ex extended warranties.
- D (Low Probability, Low Financial Impact) such insurance can be outright ignored like loss of credit card.
Sometimes probability of event occurrence can depend on your job profile or individual situation. Take the case of IT professionals, day and night they work in front of their computers or laptops. The prolonged sitting leads to problems such as back pains. This means they have a greater risk of physical health problems and so they will be more concerned about them. Now consider a manufacturing company. The probability of an accident taking place is high. For them, the probability of being involved in an accident is their biggest concern and so it will be their top priority. And what about professionals such as doctors? Have you ever thought of what could happen when a patient dies in a hospital and the family files a lawsuit against the doctor. It may not have been the doctor’s fault but sometime it takes years to get a decision in the court and the time spent can be disastrous, leave alone the loss of money. Then imagine what the consequences of the doctor losing the battle would be. The amount payable as compensation could be a big setback financially. So won’t it be on the priority list of professionals like doctors to get insurance for such risks.
Insurance Policies that you may not need
There are some insurance policies which people generally don’t need:
1. Insurance for investment purpose – Insurance is an investment is a myth which companies or agents have played around with to maximize their earnings. Since we are use to looking at receiving a return on every penny we spend in our lifetime only, agents or companies push expensive products with return maximization strategies. This leads us to buy the wrong products every time. Don’t mix insurance and investments. This is also applicable on investment products which offer insurance benefits – some mutual funds offer benefit of health & life insurance if you invest in their schemes. These offers should be ignored as they will always come with some hidden T & C of exit loads & expenses. Also ignore health insurance policies which have investment component, go for plain vanilla health insurance products. Read – Mixing Insurance & Investment
2. Life insurance for children – All parents want to ensure their child’s future. And to do this, some wants to by a child policy which can meet their child’s financial requirements. But buying a policy on child’s name is not the right solution as the objective of insurance is to support your dependents financially when you are no more. Hence, the insurance has to be in your name rather than the child. Read – Child Future Plan
3. Excess Accidental Insurance (death) – Accidental insurance is a must have insurance but in India there are some limitations in the product. Biggest flaw is that in most of the cases accidental death is the base policy, which is already covered in the term insurance. So if someone already has sufficient life cover through term plan this insurance is not required. Lot of people also opt for accidental death benefit rider in case of traditional insurance policies. They should check their total life coverage before taking any decision. In international markets dismemberment policy can be bought with accidental death benefit, which is not the case in India. So check your cashflow before taking decision on this.
4. Wedding insurance & Flight Insurance – These will fall under low probability but high impact category. Flight Insurance can be clearly ignored as that will be covered under life insurance. Wedding insurance is a new category in general insurance which covers loss due to wedding cancellation, damage of property, personal accident & public liability. Accidental & property damage overlaps with comprehensive accidental insurance policy & householder insurance policy so is of less consideration. So it’s about wedding cancellation & public liability which can have significant financial impact. But in India people are more accommodating in case of cancellation of event in comparison to western world and add to it the list of exclusion in such policies, wedding insurance is still not in a priority list.
5. Credit card insurance – How many times you lost your credit card? Even if once, what’s the first thing that you did? I think you asked to block your card & the card company issued a new card. So my suggestion will be rather than taking insurance for loss of credit card, make sure it’s not lost or keep lesser limits card in your wallet.
But there is another issue. When you get credit card from bank or financial institution, they start pitching lot of insurance policies which are marketed as “especially available for our card holders” – health insurance, accidental insurance are the most common. In most of the cases, either these policies are expensive or come with lot of limitations. Moreover, insurance in these policies may not be transferred if you don’t want to continue with your card company. So why to stuck with such policies…. Just Keep Things Simple.
I know this is not the complete list & there can be few other policies that can be ignored – I will love to hear your views on the same.