Saturday, January 5, 2008

Insurance Coverage Planning

Insurance is probably the most useful financial instrument ever devised by man. Most individuals, however, do not clearly understand the mechanics of insurance to fully utilize its potential as a tool to protect their loved ones. The basic concept of insurance is simple but elusive to many individuals. Insurance is primarily to protect the economic value of individuals or assets from unforeseen events.

Economic value is derived from the earning capacity of an individual and the financial dependence of other lives on that earning capacity. Insurance will be able to replace the loss of earning capacity of individuals due to unforeseen circumstances and ensure that the standard of living of dependents are not affected financially.

As a basic guideline it is vital that you understand why are you buying insurance -- it should primarily be for protection and not for investment. These form of insurance are generally known as term insurance. Term insurance offers the modest form of coverage since it is the most basic, plain vanilla, version of insurance. Apart from life, other forms of protection offered are hospitalisaton & surgery, permanent disability, etc. Individuals should also consider the adequacy of protection on their assets from events such as fire, theft, etc.

There are other life insurance products in the market which combines protection and investment into a single product. Common insurance products which suit the description above are whole life, endowment, & investment linked insurance.