Navigating the World of Insurance

Shielding Your Future - Issue #102 (7 min read)

In my pursuit of delivering genuine and reliable information to Good Vibe readers, we often collaborate with experts in various fields. Today's newsletter on the intricacies of insurance comes courtesy of Sumit Ramani

Background

When the Black Death swept through Europe during the middle of the 14th century, Scottish soldiers recognized a chance amidst the turmoil. The plague first hit England in 1348 and spread across the country. Scotts perceived this as an ideal moment to conquer the neighbours  and launched an invasion into northern England in 1349.

Gathering their troops within Selkirk's dense forest, the Scots unintentionally created an environment conducive to the spread of the plague, resulting in the death of 5,000 soldiers. Instead of advancing with their invasion plans, they chose to withdraw, unknowingly carrying the plague's devastation back to their homeland. As a result, one-third of the Scottish population succumbed to the deadly disease.

Just like Scots in the mid-fourteenth century, all of us today, after 700 years, make the mistake of believing that risk is what happens to others and we are immune to it. In reality, we are all exposed to risks and when the risk becomes a reality, there could be financial consequences. This is where insurance steps in - to shield us against the financial impacts of risky events.

Why Insurance?

We now have some flavour of why one needs insurance. Before proceeding further let's dive a bit deeper into the value added by insurance

Financial Protection: Insurance shields you from unexpected financial shocks. It prevents a medical emergency, an accident, or a natural disaster from wiping out your savings and assets.

Peace of Mind: Knowing that you're covered brings peace of mind. You can focus on living your life without constant worry about what might go wrong.

Risk Management: Insurance is a fundamental tool for managing risk. It allows individuals and businesses to transfer the financial consequences of certain risks to insurers, reducing the overall risk exposure.

Supporting Loved Ones: Life insurance ensures that your family doesn't face financial hardship if you're no longer there to provide for them. It's a powerful way to secure their future.

Legal Compliance: Many types of insurance are mandatory, such as auto insurance for vehicles. Complying with insurance requirements is not only a legal obligation but also a responsible way to protect yourself and others.

Do you need Insurance?

Still wondering if you need insurance? Let’s do a simple test. 

In case an unfortunate event occurs resulting in damage to lives, health, or assets that you own, would the financial impact of the loss derail your financial journey and/or lifestyle?

If the answer is yes, you need an insurance cover else you can skip it!

To highlight, the simple test we just did, doesn’t talk about the probability of risk. That’s because it is irrelevant to deciding whether one needs insurance or not. If the probability is less, it is reflected in the premiums and it is best to leave the maths to actuaries. As long as one is exposed to risk and there could be financial consequences leading to financial strain, insurance is necessary.

What all needs to be insured?

Pretty much everything that gets damaged or lost results in financial strain should get insured. For most individuals, the following types of insurance are worth considering

• Life Insurance - to ensure a similar lifestyle for dependents in case of an untimely demise.

• Medical Insurance - to ensure minimal financial impact due to the medical situation resulting in hospitalisation.

• Critical Illness Insurance - to ensure minimal financial impact due to critical illness. While Medical Insurance would also cover expenses towards Critical Illness diseases, the Critical Illness covers should be significantly higher than Medical Insurance due to the much higher cost of treatment, and hence might be a good idea to buy separate covers.

• Disability Insurance - to ensure minimal financial impact due to loss of income resulting in total/partial disability of permanent /temporary in nature. To clarify, Medical Insurance would cover hospitalisation but not for loss of income due to disability.

• Home Insurance  -to ensure minimal financial impact due to damage of home structure and contents resulting from natural/man-made disasters like floods, cyclones, and fire.

• Auto Insurance - to ensure minimal financial impact due to damage/theft of bike/car and liabilities arising from damage to third-party from accidents.

• Emergency corpus -to ensure minimal financial impact due to loss of income (like job loss) in the short term. Also, acts as a catch-all corpus for risks not covered by insurance policies. This is not a type of insurance cover that can be bought but acts like a safety just like other insurance covers.

The image below summarises the types of insurance coverage along with the lifestage when they become necessary. For example, Medical and Critical Illness covers are required for the entire lifetime but life/term insurance is only relevant during the earning phase

Is that all?

The insurance covers mentioned above are the most basic type of covers that everyone must consider buying but the list is surely very long and would depend on individual financial circumstances and lifestage.

In particular, under health insurance, we touched upon insurance covering an individual against hospitalization, critical illness, and disability risks. But there are at least two more situations that could lead to significant financial strain. Equally, professionals are exposed to a few additional risks.

• Incapacity i.e. inability to earn due to medical situation. This doesn’t get covered under any of the three health covers we discussed because one is neither hospitalised nor critically ill or disabled (implying lost limbs or eyes). A good example of this is surgeons unable to carry out surgeries because the hands start to shake due to old age or a medical situation. While the surgeon would still be fit to work as a physician (maybe not as a surgeon) resulting in lower income. This loss in income also needs to be insured. Unfortunately, there aren’t any meaningful covers offered in India at this time. In the Western world, they are available and sold as Income Protection covers.

•  Long-Term Care - those who have aging family members would relate to the situation wherein the senior members are neither hospitalised nor ill but need the care of nursing staff and related assistance. This could be a significant expense and is not covered in any of the three health covers offered in India.

• Professional Liability - this insurance coverage provides financial protection to professionals in case they are sued for alleged negligence, errors, or omissions while providing their professional services. This insurance is especially important for individuals like doctors, and Chartered Accountants who offer advice, expertise, or services to clients, as it helps mitigate the financial risks associated with legal claims and litigation.  

• Cyber Insurance - While the digital transformation offers numerous advantages, it also exposes professionals to new risks, particularly in the realm of cybersecurity. This specialised insurance becomes relevant in case one deals with sensitive data and is designed to protect professionals from the financial fallout of cyber threats and data breaches.

How much Insurance does one need?

It is important to appreciate that insurance covers are meant to make good the losses and bring the insured back to the same financial position. The appropriate size of insurance coverage varies greatly from person to person and depends on individual circumstances, needs, and financial goals.

For example, life insurance should be sufficient to ensure that survivors have similar lifestyles after the demise of the main breadwinner. Hence it is driven by the expenses of the surviving family members for the rest of their lifetimes, accounting for inflation and also covering any outstanding loans. 

Another way to think about the size of life insurance is the “Retirement Corpus” of the rest of the family members. So if you decided to retire today, how much corpus would you need? Take your expenses out of it and that becomes the appropriate size of life insurance. While this is a good sense check arriving at the size of the cover requires a lot more rigour and is best left to experts.

To summarise, the size of the cover varies significantly based on an individual’s financial situation and goals and should be arrived at using a scientific approach and after consulting with the financial advisors. A rule of thumb gets a thumbs down when it comes to take most crucial decisions of life!

About the author: Sumit Ramani is an Information and Communication Technology engineer turned actuary. In his previous avatars, he has designed and priced insurance products. He is passionate about Personal Finance and is focused on simplifying personal finance for people at large. He is a co-founder of ProtectMeWell.com which is democratising financial planning through APIs for individuals, financial advisors, and manufacturers. He is active on Twitter and can be reached at @RamaniSumit

All illustrations are by Kratika Singhal

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🌟 A Glimpse from Deep Health Workshop at Kanha 🌟

Over the last three days at Kanha, the Deep Health Workshop not only offered insightful lessons but also paved the way for transformative journeys. Participants delved deep into the nuances of health and well-being. The lush backdrop of Kanha further accentuated the experience, instilling a sense of peace and rejuvenation. As we conclude, the echoes of enlightenment and camaraderie will surely resonate for times to come.

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See you next Sunday. Take care!