Risk aversion is the primary reason for people to avail of insurance. At the same time, there are some factors which discourage people for ignoring it.
A large number of people are optimist. They do not think that something can go wrong in their lives. Insurance does not make any sense to them. Are you among those people? Or have you come across such people?
Well, no wonder. There are several such examples around us. Especially people who are young take life as it comes. But there are millions of incidents which exemplify the critical role of insurance in one’s life. Accidents can happen with anyone at any point of time. Problems can come calling without giving any advance notice. Yes, that is the reality of life and you cannot shy away from it.
Still, people tend to find reasons to not buy insurance or buy very less amount of coverage. Here are some of those major factors which influence people’s decisions.
Income and wealth
There are different dimensions of income and wealth vis-a-vis insurance. They all are interlinked. A person looks for insurance if he has created assets through income and wealth.
The net worth of assets directly influences the amount of coverage. At the same time, a wealthy person tends to ignore insurance coverage for some assets.
It is generally observed that the degree of risk aversion gradually declines with the increase in income and wealth. Similarly, if a person has a limited number of assets, he could be more protective and averse to risk.
This is a human tendency, well-supported by research studies.
Since insurance is a service provided by profit-making companies in both private and public sectors, it involves certain costs towards operations and management. These are generally termed as administrative costs which the insurer incurs towards the buying transaction and subsequent deployment of funds. Many times, a higher amount of premium loading de-motivates a person.
In the industry, there is a concept of zero-loading. However, rarely any company follows this concept. Given the high costs of infrastructure and resources, insurers have no alternative but to charge customers.
However, at times, these charges are unreasonably high and exploitative.
On a positive note, the Insurance Regulatory and Development Authority of India (IRDAI) is increasingly focussing on e-Governance and this is likely to bring down the transaction and administrative costs by several times. Also, the Authority is setting limits to premium loading, and it is not that insurers can charge whatever they want.
The lock-in period is another major deterrent to buying insurance. This is especially true with life insurance. Under section 80C of the Income Tax Act, one can claim exemption of up to Rs 1 lakh for buying life insurance policies. This limit was recently increased under the Union Budget 2013-14 by Rs 50,000. Therefore, one can invest up to Rs 1,50,000 under life insurance and claim income tax deductions.
It is a huge benefit and people can save a large part of their income going in the form of tax. Just imagine, if you were in the tax bracket of 30 per cent and a deduction of an additional Rs 50,000 brings it down to the bracket of 20 per cent. This single step can have a lasting impact on your tax returns and you get much more in the form of savings and investments.
It is a sort of forced savings which results in investment for you. Later on, after a few years, you realise that you have a sizeable corpus in hand – which could never be possible in case there was no incentive on the income tax saving front.
It is due to such benefits, life insurance policies come up with a lock-in period of 3-5 years. The premium amount you pay is channelized in investment activities and this helps in growth and development in the country.
The condition of lock-in period is imposed to avoid misuse of insurance as there are possibilities that people buy insurance just for claiming income tax exemption and then ask for refund.
So, should you avoid insurance?
After all said and discussed, it still concludes that you do require insurance whether life or general insurance. There is no second thought on the importance of insurance in the well-being of our financial lives.
So, why not to ensure peace of mind by taking this little yet significant step forward?
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Naval Goel is the Founder & CEO of PolicyX.com which was established in the year 2013. Naval has an expertise in the insurance sector and has a professional experience of more than 5 years in the industry. Before venturing into the field of entrepreneurship, Naval had worked with top companies like AIG in New York as a part of their corporate team. He is also an Associate Member of the 'Indian Institute of Insurance', Pune.View Complete Profile
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