What is Insurance?
It is a contract between the insured and the insurance company whereby the insured financial risk is covered by the insurance company. The risk can be of your vehicle, property, legal etc. So effectively, you pass on the risk to the insurances company and they charge you a nominal sum of money for taking that risk which is called Insurance Premium.
It is said that Rama, Krishna, Bhishma, and Buddha, knew the time when they would leave this world. To put simply, each of them come to live with their disciples with a mission or set of responsibility to fulfill. Does any one of us know when something will go wrong with us and whether that time our responsibilities to fulfill? Does any one of us know when something will go wrong with us and whether that time our responsibilities would be over or not? We all know that in life unexpected is always expected. Our life is full of uncertainties with a lot of goals, short-term goals, long term goals, known goals – unknown goals. We are all born with some responsibilities to fulfill…..but we do not know how much time we will get to fulfill those responsibilities.
What if anything goes wrong with us, who will provide financial security to the family. Who will fulfill all the dreams that you would have thought for. This is where it can help you. Insurances are one of the greatest inventions in the field of personal financial products. But it becomes fatal to financial life and costly once you end purchasing the wrong insurance solution.
What Happens in Real Life?
The answer to this lies in 2 questions “why did I buy this insurance” and “what product I bought”. Typically you buy insurances products as investments and not insurance. That is why we say that Indians have actually not understood insurances in the right sense. First of all, less than 5% of the Indians have a policy and add to this, out of those who are insured, the average life insurances cover is less than Rs. 90000/-.
We all understand insurance as an investment and land up buying EXPENSIVE Product. We all buy Endowment Money Back. ULIPs etc. Now when you buy an expensive product, you will actually be the loser and the manufacturer and the middlemen will be the winner. Is it not? All one needs is to have a simple Term Insurance Policy/ Term Life Insurance Plan.
Mixing Insurance & Investment
Check – What is Mutual Fund?
Mixing insurance and investment is something we should totally avoid. When your insurance agent chase you, does he sell you insurance products? Or does he offer you investment opportunities and tax-saving schemes? In 99 of the 100 cases, agents don’t sell pure insurance. The insurance agents are driven by the first-year commission that they get and they are hardly bothered whether or not it is really right for you or not. In fact, that is the reason, why most of the investors we meet, say that they don’t see their agents after first premium. They make a heavy commission by selling the product. Now we don’t have to explain that the commission that they make is actually deducted out of your investment and it could be as high as 70% of your premium.
Insurance is an Expense
Similarly is life insurance. We all must buy simple insurance even before we start thinking of investing for the future. Understanding insurances as an investment or mixing insurance & investment is not a wise decision.
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