What Is Insurance And Why Is It So Important?

We all have been advised to buy insurance more than once – for life, health, and even for buying a new car or starting a new business.

But, often we shy away from buying insurance, thinking why do I need to buy a life or health insurance being a young and healthy person? Or, why do I need insurance for my car, I have good driving skills?

Contrary to such thoughts, no matter how healthy we are or how well we are doing financially or how good a driver we are, we all need insurance. This is simply because insurance acts as a safety net that financially protects you and your family when chips are down.

In this blog, we will talk all about insurance, i.e. what it means, what are the most essential kinds of insurance, and why it is important.

What is insurance?

The concept of insurance is very simple to understand. You pay a monthly or yearly fee to the insurance company to insure your life, health, vehicle, property, etc for a certain period. In return, the insurer pays for the financial damages in case of any harm to the insured person or object.

So you are transferring the risk of a financial loss you might experience due to life’s uncertainties to an insurance company for a small fee. For example, if you meet with a car accident and need to be hospitalized. Your health insurance policy will cover the medical costs for hospitalization. And, your car insurance will pay for the damages to your car.  Meanwhile, if you die during the accident, your family will receive a lump sum amount for your term insurance.

From arts to pets, there is insurance available for a number of things, and one should avail of insurance as per their needs and priorities. But there are 3 types of insurances that are most essential.

The 3 most important insurances are:

Life Insurance:

Life insurance financially protects your family in case you die an early death. Here is how it works. You pay a regular premium to the insurance company for a specific number of years. In return the insurance company pays a sum assured to your family if you die during the policy tenure.

There are different types of life insurance policies and in some of those, you get a lump sum amount if you live through the policy tenure. For example, term insurance provides higher coverage for a lower premium amount as compared to other life insurance policies. But no money is paid to the policyholder if he survives the term. Meanwhile, for policies like endowment or moneyback, the policyholder receives a lump sum after the policy tenure ends. For such policies, premium amounts are much higher against the coverage, as compared to term insurance.

Health Insurance:

Health Insurance is a way to ensure you and your family can get the best medical care without you worrying about the cost.

In a health insurance policy, the cost of medical treatment of the insured person(s) is borne by the insurance company. In exchange for a regular premium paid by you, the insurance company pays for all the expenses related to an illness for which the insured person needs treatment. This includes hospitalization, daycare, post, and pre-hospitalization, etc. And with the cashless facility, your bill is directly settled between the company and the hospital

Liability Insurance:

Such insurance is availed to insure properties, cars, businesses, etc. On buying a liability insurance -like car insurance, home insurance, business insurance, in case of any damage to the insured object or property during the policy tenure, the insurance company will financially compensate the owner of the policyholder.

Now that you know the important type of insurance, let’s talk about why do you need insurance.

Reasons everyone should get insurance

As we said at the start, most people think insurance is an unnecessary expense. The reason is that we feel confident about our future and our ability to tackle unseen circumstances. But there is a huge difference between our perceived ability and reality. For instance, a few years of savings can vanish in case of a medical emergency. That’s just one example.

Here are 3 reasons why getting insurance is important:

#1: Insurance ensures family’s financial stability

No matter how much you have managed to save or what your monthly income is, an unexpected event can burn a huge hole in your pocket or can simply jeopardize your family’s financial future.

For example, if you do not have adequate life insurance, your family might have to go through financial hardship if you were to meet with an untimely death. Though no amount of money can replace the loss of loved ones, having life insurance would save them from going through financial hardship. Meanwhile, if you or your family do not have enough health insurance, then huge medical bills during any treatment can completely shake your finances.

So it is essential that you cover yourself, your family with an adequate amount of insurance.

#2: Insurance brings peace of mind

The premium you pay to the insurance company is the price that guarantees that the insurance company will cover the damage in case of an unforeseen event. And, that guarantee that your risk is covered brings peace of mind.

For example, let’s suppose you die an untimely death at a time when you still have several milestones to achieve like children’s education, their marriage, a retirement corpus for your spouse etc. Also there is a debt as a housing loan. Your untimely demise can put your family in a hand to mouth situation. But, if you would have bought term insurance considering all these factors, your family would be able to sail through during the hard times.

#3: Insurance reduces stress during difficult times

No matter how hard you try to make your life better, an unforeseen event can completely turn things upside down, leaving you physically, emotionally and financially strained. Having adequate insurance helps in the sense that at least you don’t have to think about money during such a hard time, and can focus on recovery.

For example, suppose you or someone in your family had a heart attack and needs immediate hospitalization. Such treatments at good hospitals can cost lakhs. So having health insurance in this case, saves you the worries and stress of arranging money.  With insurance in place, any financial stress will be taken care of, and you can focus on your recovery.

Bottom Line:

Having insurance – life, health, and liability – is an essential part of financial planning. It can save you from financial hardship in case of any unforeseen circumstances. However, the decision to buy insurance should be determined by three factors – requirement, the benefits you get from the policy, and your ability to pay the premium.

*This blog originally made available by ET Money.