Several factors influence the life insurance coverage amount for risk. These include your lifestyle expenses, your child's education fee, EMIs of credits, future goals, dependents in your family and o on. Hence, you should keep this in mind when purchasing a life insurance policy.
What is The Role of Insurance in Risk Management?
Often you must have heard, “The key is to manage the risk, not to avoid it.” The chances of risks are present in almost every aspect of your life. Hence, instead of looking for ways to avoid them, it would be prudent to stay financially prepared.
You can do so by purchasing an insurance policy, as they often act as a safety net in monetary emergencies. Keep reading to decode the role of insurance in risk management so that you can deduce why it is mandatory to purchase one.
What Is Risk Management?
In layman's terms, risk management refers to identifying and controlling the risks associated with your actions. Risks can be related to assets, health, life, etc. Hence, staying emotionally and financially prepared for competently dealing with such risks becomes imperative.
One of the most preferred tools to manage such risks is life insurance. A top financial expert said, ‘Life insurance is not an investment. It is a risk management tool to protect future income’. A life insurance policy provides substantial coverage to an insured person to effectively deal with such risk.
Here is a comprehensive guide on purchasing an insurance policy that can help you reduce various risks.
How Does Insurance Reduce Risk?
The two major risks that are common for all people include life risks and health risks. These risks usually demand a lot of money for proper management and can financially ruin people's lives. Apart from these, other risks can pose a monetary hurdle.
Here are some ways in which insurance policies can provide monetary coverage to the policyholder when they face any of the above risks:
Risk of Life
This is mainly beneficial to the nominee when the policyholder passes away. It can also provide monetary support to the insured if they outlive the policy duration. An insurance policy can provide support in the following manner:
- Securing your family’s future: By purchasing a life insurance policy, your family can stay financially protected after your demise. The claim amount is high enough to ensure that your nominee does not have to seek financial support from anyone else. Also, they will not have to compromise on their current lifestyle.
- Encouraging savings and investments: Putting your money in insurance policies encourages you to save more. Also, there are several life insurance policies like ULIPs where a part of your premium is invested in various financial instruments. This can provide you with sumptuous returns and help in wealth creation.
- Fulfilling financial goals: Wondering how life insurance can fulfil financial goals? Life insurance policies like ULIPs allow you to withdraw money after the completion of the lock-in period to provide money in case of emergencies. Also, you can get substantial returns from them to fulfil your financial goals.
Risk of Health
It is mandatory for individuals to purchase a health insurance policy so that they will not have to worry about money when their condition is critical. Many insurers also offer cashless claim settlements so that policyholders can get treated at the right time.
- Providing monetary support: A health insurance policy can act as a cushion when the policyholder has to undergo an expensive treatment. This helps them to stay worry-free about medical expenses and concentrate solely on getting the best treatment for instant recovery.
- Offering additional protection: You can purchase several riders along with your insurance policy for extended coverage. This saves you from having to purchase multiple policies and pay hefty premiums. However, you should pick only the essential riders to avoid paying unnecessarily extra.
Other Types of Risks
Several other types of big-ticket risks may not apply to all. These usually include vehicle repairs, business losses and so on. Entrepreneurs and vehicle owners can also purchase insurance to safeguard themselves from financial risks.
- Safeguarding from financial loss: A business insurance policy can provide financial support when going through substantial losses. This can help the venture get back on its feet amidst the financial crisis. Similarly, a vehicle insurance policy can also provide sufficient coverage for repairs on getting damaged during accidents.
- Offering several riders and bonuses: A vehicle insurance policy usually offers No Claim Bonuses if you do not raise a claim during the policy duration. You can also opt for several add-ons if you want extended coverage. However, you should carefully select them as they can raise the cost of premiums.
The role of insurance in risk management is indeed undeniable. So, it becomes imperative to purchase one for enhanced financial security. However, there are a variety of policies available in the market. Hence, select the most fitting one to make the most of your purchase.
FAQs on the Role of Insurance in Risk Management
Some of the most frequent risks businesses often encounter include operational, compliance, strategic, and reputational risks. However, insurance policies can provide substantial monetary support to business owners under such circumstances so that they can handle those situations well.
There are several features of ULIP that can help policyholders in risk management. These usually include substantial financial protection, partial withdrawal facility, systemic investment options, increased returns on maturity, complete control of investments, etc. So, you can completely depend on ULIP for such situations.
Insurance policies offer protection from financial loss, improve liability, and better the reputation of the venture. Hence, it becomes mandatory for budding entrepreneurs to purchase an insurance policy to cover their finances. This will, in turn, help you to stay worry-free about emergencies.
The steps involved in risk management include identifying the risks, assessing the hazard, deciding the steps to take for managing the situation, implementing the control measures, supervising the implementation of the plan and watching for new possible risks.
Important Guides related to Life Insurance
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.