Protecting Your Finances: The Importance of Adequate Insurance Coverage

Importance of insurance coverage

 

An insurance policy is a financial protection tool which covers the financial loss suffered in an unforeseen event. For instance, a life insurance policy covers the risk of premature demise. If the life assured passes away during the policy tenure, the policy pays a financial benefit to help the family deal with the loss suffered.

The importance of insurance coverage lies in the financial aid that it provides. In the case of an unfortunate event or emergency, you might incur a financial loss which might put a strain on your budget. An insurance policy covers this loss and helps you tide over difficult situations.

 

Why is insurance important?

 

Insurance is important because of the following reasons –

• It covers different types of financial risks that you face and which, if incurred, might cause a financial loss
• The importance of insurance coverage also lies in the mental peace that it provides. When you know that insurance will cover the possible losses that you face, you can be at ease
• There are different types of insurance policies which cover different types of losses. You can choose a policy that aligns with your coverage needs
• With some insurance plans, like life and health insurance, you also get tax benefits. Such plans help you reduce your tax liability
• Life insurance plans also aid in creating a financial corpus for your goals

 

Types of insurance:

 

As mentioned earlier, there are different types of insurance policies. Here’s a broad classification of insurance and its types –

Life insurance includes plans which cover the risk of premature demise. Some plans also help in creating a savings corpus. The different types of life insurance plans include the following –

● Term insurance

Protection-oriented plans which primarily cover the risk of dying early

● Endowment insurance

Savings-oriented plans which provide insurance protection and also help in creating a savings corpus

● Money-back plans

Also savings-oriented plans which offer liquidity through regular money-back benefits

● Whole life plans

Savings-oriented plans which run till 99 or 100 years of age

● ULIPs

Investment-oriented plans which offer market-linked returns and insurance protection

● Pension plans

Retirement-oriented plans which help in creating a corpus for retirement and create a regular pension income

General insurance plans include other types of plans which cover different assets. Common types include the following –

● Health insurance plans

cover medical bills in the case of injuries or illnesses

● Motor insurance plans

cover the financial loss suffered involving a bike or a car

● Travel insurance plans

cover financial losses suffered during a trip

● Fire insurance

covers the loss suffered due to fire and other associated perils

● Home insurance

covers the structure of your home and/or its contents against possible losses

 

Coverage in insurance & the amount of coverage

 

In insurance parlance, coverage means the maximum financial protection offered under the insurance policy. It is the limit of loss up to which the insurance company would compensate you in the case of a claim. For instance, say you buy a term insurance policy of ₹50 lakhs. In the case of premature demise, the policy would pay ₹50 lakhs as the death benefit. Similarly, if you have a health insurance policy of ₹5 lakhs, medical bills up to ₹5 lakhs would be covered. If the bills are higher, you pay the excess.

Choosing an adequate amount of coverage is important so that your losses are covered adequately. If you buy coverage which is lower than the possible loss, you suffer out-of-pocket expenses. For instance, if you have a health plan of ₹5 lakhs and you incur a bill of ₹7 lakhs, the policy will pay a maximum coverage of ₹5 lakhs. The remaining ₹2 lakhs would be your out-of-pocket expense which might put a strain on your finances.

So, when choosing the amount of coverage, assess your coverage needs and the estimated funds needed to compensate for the loss that you might suffer. Find out the right coverage required and then buy it for adequate protection.

 

Features of insurance coverage:

 

Some of the common features of insurance coverage are as follows –

• The choice of coverage depends on you. The insurance company might specify and minimum and maximum coverage limit and you can choose a coverage within the specified limit
• Life insurance plans might offer unlimited coverage options. Thus, you can choose a coverage that suits your needs
• In the case of insurance of assets, the maximum coverage might be limited to the cost of the asset. For instance, in the case of motor insurance, the maximum coverage depends on the value of the vehicle
• In some plans, you might increase the coverage when renewing the existing policy

 

Which Insurance Coverage type suits you?

 

The choice of insurance plans depends on your needs and the risks that you face. Thus, you should assess your coverage requirements and then choose the right type of insurance coverage.

For instance, life insurance plans suit most individuals since everyone faces the risk of premature demise. Thus, you can buy life insurance to protect against this risk. Similarly, health insurance plans are also suitable for most households because the risk of medical emergencies cannot be avoided.

Besides life and health insurance plans, the choice of other types of insurance coverage depends on your needs. For instance, if you have a vehicle, a vehicle insurance policy would be a must as it is mandatory per the Motor Vehicles Act of 1988¹.

So, assess your coverage needs and buy the right types of plans.

 

Things to consider while selecting the right Insurance Plan

 

Some things to consider when buying the right insurance plan are as follows –

• See if the plan suits your coverage needs
• When choosing the coverage amount, try to choose coverage which would be adequate to cover the possible losses that you might face
• In the case of long-term plans, choose the right tenure
• If the insurance plan offers optional coverage benefits called riders, assess which riders would suit your needs. Choose the appropriate riders for an inclusive scope of protection
• Ensure that the premiums of the policy are affordable for easy payments

 

Conclusion

 

Assess your financial needs and then select the types of insurance coverage that suit your requirements. Choose the right coverage amount so that you can be adequately compensated in the case of unforeseen eventualities. The importance of insurance coverage lies in the protection that it provides. By covering unavoidable risks, insurance plans give you peace of mind and help you face financial emergencies. So, add insurance to your financial portfolio and be prepared against possible emergencies.

 

FAQs

 

1. How much term insurance coverage do I need?

The coverage amount of your term insurance plan depends on your income, expenses, financial goals, existing assets and liabilities and other factors. There are online term insurance calculators which help you calculate an adequate sum assured for the policy based on your age, income and other factors.

So, when buying term insurance, you can use these online calculators and find out the insurance coverage which would be adequate to provide the financial assistance you need.

2. Is a health insurance policy important?

A health insurance plan covers the medical expenses that you might incur in the case of illnesses or injuries. In today’s age, illnesses like diabetes, hypertension, etc. are becoming common. They might result in medical complications which can lead to hospitalisation and expensive treatments. Moreover, medical expenses are rising steadily. Affording the treatment costs might incur a financial strain. As such, a health insurance policy becomes important. By covering your medical expenses, it allows you to afford quality healthcare without incurring a financial burden.

3. Why is a motor insurance plan mandatory?

The Motor Vehicles Act of 19881 mandates that every vehicle running on Indian roads should be insured under a valid third-party insurance policy. As such, if you own a vehicle, whether a car or a bike, you need mandatory third-party coverage on it to fulfil the rules of the Act.

 

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