Tips on Buying the Right Insurance:: Part 1

In India, insurance is broadly divided into life and general insurance. Life insurance covers a family against the financial implications of the death of the insured.

In addition, it may also provide certain survival benefits, in case the policyholder survives the policy term. Life insurance policies are broadly termed as "benefit policies".

General insurance is a broad term encompassing protection in several areas such as health (For some strange reason, it is not treated as a part of the life insurance sector), property, professional liability among others. These are usually "non-benefit" covers. They will only reimburse losses suffered and not confer any additional benefits to the policyholder.

We shall discuss individual heads of insurance and the products therein in greater detail in later articles.

Before deciding whether you require insurance or not (although all of us certainly require it in some form or the other), take the following into consideration:

The probability and impact of an event:

Assess the probability of an event and its financial impact on you, before zeroing in on a policy. Of course, an element of intuitiveness, is contained in the estimation but it is preferable to a random choice.

For instance, a shopowner in Mumbai can consider an earthquake as an event, which will occur infrequently but may still opt to insure against it, as the financial damage in case of an earthquake, could be significant.

Also, if the event occurs infrequently, the premium charged by an insurance company is also low. If an event occurs very frequently (like earthquakes in Japan), the premium will be high. Of course in the case of life insurance, although death is a certainty, the financial impact of death will vary with age, and the number of dependents.

Will I be adequately insured?

Merely having a cover is not enough. Take care to ensure that the cover is adequate for you. Too small a cover is virtually pointless, considering that it will not serve yours or your family's purpose.

Too much insurance will mean wastage of precious money towards payment of premiums. There are certain techniques to help you estimate the right quantum of cover. We will discuss these later.