Every asset has an economic value, but 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. For reducing 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.
"But practically it's not possible because if you try to insure everything under the sun, you will be left with no money for your living expenses & financial goals. One should, therefore, consider two things before taking any insurance - the probability of an event & its financial impact on your life," says Hemant Beniwal, a Sebi-registered investment adviser.
It can be simply understood by this grid:
A: High Probability, High Financial Impact - type should be covered without any second thought - e.g. health insurance & motor insurance.
B: Low Probability, High Financial Impact - type can have a significant financial impact. So should be considered after looking at personal situations & assets; e.g. term insurance, accidental insurance & critical care insurance.
C: High Probability, Low Financial Impact - In this case risk should be retained or transferred to insurance companies; e.g. extended warranties.
D: Low Probability, Low Financial Impact - Such insurance can be outrightly ignored, like credit card insurance.
Sometimes the probability of an event may depend on your job profile or individual situation. Take the case of IT professionals, for instance. They sit in front of their computers or laptops for most part of the day. The prolonged sitting leads to problems such as back pain. 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 there is high. So, accidental insurance may be essential for the people working there.
Still there are some insurance policies which people don't need in normal circumstances. Here we take a look at some of them:
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 used to looking at receiving a return on every penny we spend in our lifetime, agents or companies push expensive products with return maximization strategies. This leads us to buy the wrong product every time.
Therefore, "you should never mix insurance and investments. This is also applicable on investment products which offer insurance benefits. Like some mutual funds offer the benefit of health & life insurance, if you invest in their schemes. These offers should be ignored as they always come with some hidden T&C of exit loads & expenses. Also, ignore health insurance policies which have investment components and go for plain vanilla health insurance products instead," explains Beniwal.
Life Insurance for Children: All parents want to ensure their child's future. And to do this, some want to buy 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 that of your child.
Also, "child plans -- be it ULIPs or traditional ones -- are highly costly and can fall short of inflation-adjusted corpus at the time of need for education or marriage. Even coverage may fall short of requirement, taking into consideration the high cost of primary education, leave aside higher education," says Subhabrata Ghosh, Certified Financial Planner and Member of The Financial Planners' Guild India.
Excess Accidental Insurance: Accidental insurance is a must have insurance, but in India there are some limitations in the product. The 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 a term plan, this insurance is not required. A 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.
Wedding Insurance & Flight Insurance: Both of these fall under the 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 is already covered under any comprehensive accidental insurance and householder insurance policy. So a separate cover is usually not needed for it. It's wedding cancellation & public liability, however, which can have a significant financial impact. But in India people are more accommodating in case of cancellation of an event in comparison to the western world. Add to it the list of exclusion in such policies, and wedding insurance is still not in a priority list," informs Beniwal.
Credit Card Insurance: How many times you lost your credit card? Even if once, what's the first thing that you did? In fact, you asked to block your card and the card company issued a new card. So rather than taking insurance for loss of credit card, make sure it's not lost or rather keep lesser-limit cards in your wallet.
There is another issue too. Whenever you get your credit card from a bank or financial institution, they usually start pitching a lot of insurance policies which are marketed as 'especially available for our card holders' - health insurance and accidental insurance are the most common. In most of the cases, either these policies are expensive or come with a 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 get stuck with such policies?