FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Insurance as a social security tool !
Insurance today has several implications for people from different economic backgrounds, however the basic concept of life insurance still remains the same and universal – to provide for unforeseen contingencies of death and disability of a working or earning member of the family.
The term life insurance has financial as well as legal implications which need to be understood categorically before delving into the details of any polices.
Financial Implications: Life Insurance is a financial arrangement, which redistributes the costs of unexpected loss of life among the members of the pool. The pool is a collection of people facing common risks. All members contribute a fixed amount towards a pool called premium. In exchange for the premium payment, the person gets an assurance that a certain sum of money is to be paid to him or his nominees on the happening of the event insured against
Legal Implications: Life Insurance can be defined as a contract between two parties by which one party undertakes to make good or indemnify any financial loss suffered by other party, in consideration of a sum of money, on the happening of a specified event e.g. accident or death.
The scope of life insurance can be broadly stated under the following aspects:
- Insurance of life is a risk sharing instrument.
- Life insurance is essentially a cooperative process in which a large number of people have to taken into the fold of the insuring agency and create a pool.
- The value of the life has to be estimated in order to estimate the share of each individual in terms of premium.
- Payment contingency in case of life insurance is either at death or at the expiry of term either of which will definitely occur. Thus this contract is a contract of certainty.
- Insurance is not a form of gambling and it rather serves the purpose of eliminating uncertainty of financial situation by providing for unforeseen events. It additionally serves to increase the productivity of the community by eliminating worry and increasing initiative.
- Insurance is not a form of charity as the sum assured is paid out against regular payment of stipulated premium.
A Tool for Social Security
Life insurance is one of the most effective tools of social security across the globe. In the absence of such a provision to the common people, the society will have no redressal for pitiful elderly masses, helpless widows, unprotected orphans; the factories will have to be scrapped after a fire; the houses will not be rebuilt after being struck by any calamity. With such events and more any economy cannot be stable leave alone the growth.
Our state, unlike the socialist or a developed capitalist society where states are responsible for the deprived and destitute, is ill-equipped to do so. Constitution of India has relevant clauses under the directive principles of the state policy. In article 41, it clearly dictates the state within its monetary and development capacity shall take effective measures to secure the elementary right of work, education, employment, health and any other undeserved want of every citizen.
Nevertheless, the failure of states is evident to all, with only a few schemes floated like the one for socially disadvantaged. Providing equal rights and opportunities for all is easier said than done. In the absence of the bread winner of the family there is little that the government or other social agencies can do to look after the welfare of those left behind. The same is true even in the most economically advanced nations.
Thus in order to ensure that the people left behind continue to enjoy the same privileges in society as before and thus stay with the mainstream, life insurance is a probably the best and only social security tool against unforeseen eventualities. It not only creates security but also goes ahead to foster a respect for savings to be able to secure future of the entire family.
A Tool for Independence
One has only three resources to fall back upon when a calamity strikes: savings, charity and insurance. Savings is a slow and tedious process as on average one saves only 10% of the earnings and they consume a life time to accumulate into something meaningful that can really come handy in a crisis. Additionally the exact amount that will be required is quite unpredictable making savings insufficient at most critical junctures. Charity on the other hand is demeaning and unreliable since it is completely at the mercy of the provider. Thus insurance remains the only and most viable option to fall back upon whenever crisis takes place.
Insurance is a product of ones farsightedness and present sacrifice for future anticipated gains and is thus commensurate with his self-respect and dignity. It encourages economic independence and is thus a tool of social security par excellence. The concept of life insurance has come a long way from its inception and today also provides a smart avenue for investment where the policy holder not only secures himself against unforeseen contingencies but is also able to create wealth over a period of time by letting the money paid towards insurance be invested in market oriented instruments.