The objective of purchasing insurance is to obtain financial protection against a risk, when there is uncertainty as to the timing and / or occurrence of an insurable event. For example, death is certain, but no one knows when. This uncertainty leads to two types of risk: the risk of dying prematurely and the risk of living too long.
The risk of dying prematurely would put financially dependent people in great financial difficulty and make their lives miserable.
On the other hand, the risk of living too long can cause a person to end up using the entire pension corpus, which again leads to financial hardship for the person themselves.
While the risk of living too long can be managed by purchasing a lifetime pension plan and other plans to make better use of the retirement body, the risk of dying prematurely poses greater uncertainty.
Indeed, a person cannot accumulate enough corpus to replace all of his future income. Additionally, given the uncertainty of when a person would die early, it is also not clear how much time they would have left to gain to start amassing a corpus.
As insurance companies are in a better financial position to handle such risks, by taking out insurance, a person transfers the risk to the insurer. To accept the risks, insurance companies take premiums from policyholders.
So, for anyone with dependents financially, it is very important to take out life insurance.
Since term life insurance products only cover the risk of pure death, it is the cheapest life insurance product. It is therefore advisable to take out term insurance to cover only the risk of premature death.
Health insurance: what happens to a policy after the death of an insured member?
People get sick from communicable diseases – like colds, viral fever, loss of movement, malaria, etc. – as well as non-communicable diseases – such as diabetes, hypertension, etc.
However, there are uncertainties about how often a person can get sick and how seriously ill a person can become.
The uncertainties related to the disease, coupled with the increase in the cost of care in private hospitals, make it compulsory to take out health insurance.
With the rising cost of hospitalization, the uncertainty of getting sick presents a great risk of depleting all savings due to serious illness resulting in repeated hospitalizations.
The purpose of purchasing health insurance is to transfer the risk of the cost of hospitalization – which is uncertain – by paying a premium – which is certain.
So unless they are covered by a life-long health plan, everyone should have adequate health insurance coverage to protect their savings in the event of hospitalization.
Life insurance versus health insurance
Compared to life insurance, purchasing health insurance is necessary for each individual, while life insurance coverage is necessary for those with dependents.