Sifting through the odds and probabilities of insurance

This might sound preposterous, but gambling and insurance are the same. Both depend on odds and probabilities. Actually, insurance is a type of gambling where the insurance company is betting that nothing bad will happen to you. However, you too take insurance hoping nothing bad happens to you, but if does occur, you create a financial cushion by way of insurance. For instance, you take life insurance to protect your dependents, health insurance to protect your health, motor insurance because someone may hit your car, householder’s insurance to protect your home, and travel insurance in case something happens when you are travelling. The list goes on, depending on what you find valuable to protect.

Yet, public perception of insurance has taken more beating than accolades, especially life insurance. The primary reason for perceiving insurance to be something of a rip-off stems from the gambling mentality. After all, in gambling, on an average, the house (casino) always wins. It is for this reason that most people often confuse themselves when it comes to insurance and either go uninsured or land up taking insurance without clarity and remain under-insured.

Insurance is actually the only financial instrument that transfers financial risk from you to itself. So, when you purchase an insurance policy, a specified risk of loss is passed from the policyholder to the insurer. You pay a cost, which is nothing but the premium and is similar to a wager in case of gambling, and you are on. Insurance companies pool the premiums they receive from several people and protect themselves against catastrophes or by further insuring themselves with reinsurance.

Everyone with financial dependents definitely needs a term insurance plan, but because of their structure, such plans do not offer any returns. And, because there is no return on surviving the term of the policy, people do not see the value in these. Smart insurers have of course seen the opportunity and now offer term plans, which return the premiums if one survives the tenure.

As financial complexities have grown, so have the offerings from insurers. In order to address different kinds of risks, insurers have come up with a wide range and mixture of plans. Naturally, this has meant that policies have got complex and there are always pages of fine print in legalese, which is difficult to understand and is a put-off. Most individuals need to know about the health, life and motor insurance options. If they own a house, they need to consider insurance for their home.

Fear is an ally of insurance, you fear things will go wrong and hence you take insurance. It’s again somewhat akin to gambling, where the lure of desire works. A first step to understanding insurance is to undergo a needs analysis. For each type of insurance, think about whether your fear is rational. If it isn’t, keep your money in your pocket. This way you will not only know whether you need insurance or not, you will also be able to evaluate how much risk you are exposed to, how much you can take on your own, and how much necessarily needs to be transferred to an insurance policy. In the following pages, we offer answers to some very pertinent concerns that crop up when it comes to insurance and allay your fears.

olmdesk@outlookindia.com