Recently I was booking an air ticket for myself. My wife insisted me to buy insurance cover for travel. I politely refused and here comes the googly. She told me “You only keep suggesting everyone buy insurance”. Ohh God!! I was trapped :). I replied that if start buying each and every insurance cover under the sun then my entire income will go towards payment of insurance premium.
I covered this point briefly in the post, Critical Illness Plan – Do I need it? Normally the financial planners suggest that insurance should be need based. The biggest problem is how to arrive at logical and rational financial needs. When I tried to calculate my future financial needs, my requirement was of 10 Cr term insurance plan. There was also a need of accident cover, job loss insurance cover, critical illness cover and the list was endless. Can I buy all these covers, the answer is NO? Though all insurance types may qualify as need-based because of the fear factor. Now the big question is how to decide whether to buy insurance or not. The answer lies in the probability of an event. Let’s check it out
To Buy Insurance or Not – The Probability of an Event Can Help To Decide
To consider the same example of travel insurance. As I understand it covers the following
1. Accident: Medical Treatment
2. Delay of Checked-in Baggage
3. Total Loss of Checked-in Baggage
4. Personal Liability
5. Personal Accident
6. Accident: Medical Evacuation
7. Trip Cancellation
8. Trip Curtailment
9. Emergency Travel
10. Emergency Hotel
11. Flight Delay
12. Trip Delay
13. Transportation of Mortal Remains
14. Personal Accident: Carrier
On paper, the cover looks great at a premium of Just Rs 250. Prima facie, you “need” it also but should I buy? The answer will depend on the probability of these events. The probability or list of exclusions will ensure that you might not be able to claim for most of the benefits (fringe) mentioned in the policy document. The only value I see is if the flight crash. Not many people are aware that India is signatory to Montreal Convention. Therefore, under article 21 of Montreal convention, each passenger is covered for 1.74 Lac USD i.e. 1.18 Cr in the case of a death or injury.
But here comes the most crucial data point. The probability of an air crash is just One in 11 Million. In short, it is negligible. Therefore, contrary to popular perception, Air Travel is the SAFEST mode compared to other modes of travel. This also explains why the premium is so low if you buy insurance covering domestic travel. In my opinion, as the probability of an event is almost negligible therefore I need not buy insurance for air travel. Let’s check out how to use the same parameter and arrive at the decision to buy insurance or not.
High Probability Events in Life
1. Death:
As I shared in my earlier posts also that banks work on a simple assumption that “All the customers will not walk in one fine day and withdraw all their money”. If it happens then the entire financial system will collapse. Similarly, any human being lives on a simple assumption that “He/She is never going to die”. Unfortunately, it is not correct. Death is part of the life cycle. Therefore, the probability of an event is 100%. Thus we definitely need term insurance policy because of high probability.
Another way to arrive probability is based on the family tree. You can check your family tree and the average age of your forefathers. Based on that you can estimate your life. All my grandparents lived for more than 70 years. Therefore, in my case, I can conclude that I will live for more than 70 years :). My personal target is 60.
In one of the news report, I was reading that one of the finest actors Sanjeev Kumar’s family suffered from a genetic disease because of which no male member in his family survived beyond the age of 50 years. Therefore, genes of a person also decide the life expectancy though it might not be 100% correct.
In other words, it is mandatory to buy insurance covering life. As I keep highlighting that the person should avoid traditional life covers like money back policy, endowment plans etc including ULIP. The best option is online term insurance plan. Therefore, term insurance is one of the must have insurance covers.
2. Hospitalization:
The probability of hospitalization increases with the age. Though it may also vary from individual to individual. Personally, I underwent two minor surgeries till the age of 37 years. I could not find any study done in India on the probability of hospitalization. Based the studies done abroad, it can be concluded that probability of hospitalization remains under 10% till the age of 50 years. After that, the probability of hospitalization increases exponentially from 10% at the age of 50 years to 50% at the age of 75 years. With increasing human life expectancy, the probability of hospitalization increase.
Now the question is whether to buy insurance or not covering health. The answer is definitely yes and that too at an early age even though the probability of hospitalization is under 10%. The reason being
(a) Probability of getting health insurance cover decreases with the age
(b) The premium increases exponentially with the age. If you buy health insurance at an early age the premium remains low if you maintain good health. In other words, you can save on health insurance premium.
(c) You never know you might be in 10% of the people who are hospitalized at young age like in my case :)
To conclude, health insurance is must have.
3. Calamity:
Home is where people invest their lifelong savings. If you stay in high seismic zone or area where the probability of calamity is high then you should definitely buy insurance covering home. You can also cover the content i.e. jewelry, appliances etc against theft, burglary etc. It is important to cover content if you stay in the independent house, bungalow etc because the probability of theft and burglary is high in such cases.
Optional Insurance Covers:
1. Critical Illness:
As I mentioned in my posts on the same subject that if a person has a family history of critical illness then the probability of the same is high. In such cases, it is important to buy critical illness cover as the probability is high. In other cases, though it is need-based insurance but it is not necessary to buy insurance covering critical illnesses.
2. Accident and Disability:
The probability of accident or disability due to the accident is high if your job or profession demands a lot of travel. Some of the organizations mandatorily provide accident and disability cover to their sales workforce. In one of the instance, my IT professional friend told me that he has availed accident and disability cover. The best part is that his office is in the same building where he stays and I rarely see him moving out of his building :).
Words of Wisdom:
You may find large no of insurance products in the market with different USP. Bundling with other financial products is another marketing gimmick. Normally, the USP of many insurance products is low premium or premium less than a cup of tea/day. If you buy insurance just because it is cheap then trust me you are trapped.
You should buy insurance based on your needs. If you are not able to access or gauge your needs linked to insurance cover then better to find out the probability of an event. It will make your life easier and help in better decision making.
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