Why is Insurance Important?

What is an insurance? Take for example a car insurance. Do you think it is good to have a car insurance? What if you don’t? Think if a person having a car meets with an accident. Who is going to pay for the damages of the car? Most probably, it would be the person himself/herself. But if you have a car insurance, you can be sure that your car insurer will pay you for the damages. In order to be able to seek payment from the car insurer in case of damages, you must pay your car insurer a premium, to get you protected. So, this is how insurance works. It is to protect you against a possibly large financial loss due to an unfortunate event. In exchange, you have to pay a small amount of money which we call the premium.

What could be the factors that could actually cause a financial loss to a person and his/her family? The questions to be answered by one are that how much one would like to provide to the family in the event of one’s premature death or disability due to an illness or accident. These events can put one out of work for a long period of time and one may suffer a loss of income as a result of that.

Now, the question that arises is that what type of insurance product should you take up and how much insurance do you need. This can be answered by assessing your protection needs. These needs depend on several factors. For example, your budget and how much you plan to set aside to take up your insurance plan. Also, the number of dependents of a person and their ages must be taken into account. This will determine how long the protection should be. For example, a person having young children may need a protection to cover him for a long period of time until his dependents become financially independent. The education of one’s children also matters. It must be known whether there would be sufficient funds to see them through. The debts and liabilities of one, also must be taken care of. This means that in case of any unfortunate event with the person such that he would not be able to earn anymore, will there be enough funds to pay his debts and liabilities.

Different people may need different amounts of insurance because the standard of living is different for them. A situation in which you may not require to purchase a lot of life insurance is if you have good amounts of savings and investments that can contribute towards funding your dependents.

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