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Why do we need insurance?

As a teenager, I used to believe that I was invincible- I would ride bikes without wearing helmets, play in the sun without sunscreen…my friends did worse! Until one day, I heard about a friend who had an accident, and then, a family member who got diagnosed with an incurable disease. I knew bad things can happen to good people, but little did I realize it could hit so close to home.

These incidents didn’t stop me from living life, but I did stop and think about -what’s the risk of something bad happening to me? How can I minimize them? And if they do, what would alleviate the damage? What’s worth protecting?

Risk is the possibility of an uncertain outcome, people face risks all the time…literally! We take risks with our lives on a daily basis- when we cross the road or when we take a flight, or even smoke. Forgetting a phone at the café, or a theft at our our home, these are all risks that relate to our life, health or property.

What are the big risks that everyone faces? The biggest risks are related to our biggest assets. The biggest asset we have is your body, i.e. our health or the ability to use our senses, and limbs. You need your body to enjoy life, and to earn a living. As you grow older and start a family, you collect physical assets, like a house, money, car etc, that are worth protecting because you don’t have as much time to re-build these when you are older.

Throughout your life, you constantly accept, avoid and mitigate risks – probably without even realizing it. But what do you do when the unthinkable happens? Would money help alleviate some of the problems? Can you really rely on your family and friends to help you with money?

That’s where insurance comes in.

The basic concept of insurance is simple: The payments (or premiums) of the many pay for the losses of a few. Insurance companies collect small premiums from lots of people in good times to form a large pool, and then pay out larger amounts to people who have misfortunes. So long as there are more people contributing to the pool than there are making claims, there should always be enough with the company to pay the claims. Insurance allows you to protect yourself by spreading your risk with a larger audience.

You can buy insurance for a number of risks – 

  • Health insurance – for reimbursement to pay for actual medical expenses for when you fall sick or have an accident; increasingly, health insurance packages encourage to take preventative measures so you don’t fall sick in the first place.
  • Income protection or disability insurance – for a pre-set monthly payment to pay for ongoing living expenses for when you fall sick or have an accident and are not able to work for an extended period of time; you could have a temporary or permanent disability. For example, if you break an arm and therefore can’t use your computer for months, but your sick leave is only two weeks.
  • Total and permanent disability (TPD) insurance – for a pre-set lump sum to pay for medical expenses, or living expenses for the last few months, if you have been diagnosed with a terminal illness, or suffered a permanent debilitating damage
  • Life insurance – for a pre-set lump sum for your dependents in case you die prematurely. Your family members are not your only dependents, your business partners if you are a ‘key person’ can also be your dependents.
  • General insurance – for reimbursement or a pre-set amount to pay for damage to your ‘stuff’ like house, car, possessions, travel, factory etc.

You may need some, or all, of these depending on your situation. You just have to think about the consequences of bad things happening, and how much money you would need for yourself or your dependents.

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