Taking insurance aims to get financial protection against a risk, where uncertainty is there about the timing and/or occurrence of an insurable event. For example, death is inevitable, but no one knows when. This uncertainty causes two types of risks – dying early and the chance of living too long.
The risk of dying early would put the financially dependent persons in great financial difficulty and make their life miserable.
On the other hand, the risk of living too long may result in a person using all the retirement corpus, resulting in financial difficulty for the person themself.
While the risk of living too long may be managed by buying a life-long pension plan and other plannings for the best utilization of the retirement corpus, the risk of dying early poses a more significant uncertainty.
This is because a person cacan’tccumulate enough corpus to replace their entire future earnings. Moreover, with the uncertainty of how early a person would die, it is also uncertain how long would be the remaining earning life to start accumulating a corpus.
As insurance companies are in a better financial position to manage such risks, a person transfers the risk to the insurer by taking insurance. To accept the risks, insurance companies charge premiums from the insured persons.
So, for every individual having financial dependents, itit’sery essential to take life insurance cover. As term life insurance products cover the only pure risk of death, itit’she the cheapest life insurance product. So, itit’sdvised to take term insurance to solely protect the risk of dying early.
People fall ill with communicable diseases – like the common cold, viral fever, lose motion, malaria, etc. – and non-communicable diseases – like diabetes, hypertension, etc. However, there are uncertainties over how frequent a person may get sick and how seriously ill a person may become.
The uncertainties over getting ill, coupled with the rising cost of treatment in private hospitals, make it necessary to take health insurance cover.
With the rising cost of hospitalization, the uncertainty of getting ill poses a significant risk of running out entire savings due to severe illnesses resulting in repeated hospitalization.
The purpose of taking health insurance is to transfer the risk of the cost of hospitalization – which is uncertain – by paying a premium – which is inevitable.
So, unless covered under a health scheme that covers entire life, everybody should take adequate health insurance cover to protect their savings in case of hospitalization.
Life vs. Health Insurance
Compared to life insurance, taking a health insurance cover is necessary for every individual, while a life insurance cover is necessary for those having financial dependents.