Why insure, and what not to insure

Most Indian families are under-insured where it matters and over-insured where it does not. The same household that has no term plan and only the office health policy will happily pay for phone protection, an extended warranty on a fridge, and a 'savings plan' that a relative sold them. The confusion comes from one mistake: treating insurance as a way to get money back. Insurance is a contract. You pay a small, certain amount, the premiumPremiumThe amount you pay the insurer, usually every year, to keep the policy alive., so that someone else carries a large, uncertain loss. That is the whole idea.

Protection, not investment

Think of a premium the way you think of rent. If the year passes and nothing goes wrong, the money is gone, and that is a good year. You were not cheated. You bought the right to sleep well. A policy that promises to 'give something back' has to pay for that promise somehow, so it either cuts the cover, charges much more, or both. Keep the two jobs apart: buy pure protection with insurance, and grow money with investments. Every policy that tries to do both does both badly.

The rule: insure what you cannot afford to lose

Before any policy, ask two questions. How big would the loss be? And could I pay it from savings without wrecking my plans? Insure the losses that are large and would wreck you. Carry the rest yourself. This single test sorts almost every policy you will ever be offered, and it also tells you how much cover to buy: enough to replace what you would lose, not a round number that sounds comfortable. The table below applies it to the risks most households face.

Self-insure the small stuff

Gadget protection, extended warranties, the ₹49 travel cover ticked at checkout, 'loan protection' bundled into a two-wheeler loan: these pay out rarely, the loss they cover is small, and the margins are large. Instead of buying twenty tiny policies, build one emergency fund of three to six months of essential expenses. It is the only policy with no exclusionsExclusionA situation the policy will not pay for. Every policy lists them; read that page first., no waiting period and no claim form. A cracked screen or a dead geyser comes out of it, and you top it back up next month.

Who needs what, by life stage

• Single, no one depends on your income: health cover is the priority. Term life only if a parent depends on you or co-signed a loan in your name.
• Married, or with children: term life for every earning member, a family floater health policy, and personal accident cover if you ride or drive daily.
• Parents past 60: a separate health policy for them, even if the premium looks steep. Adding them to your floater raises everyone's premium and one hospital stay empties the shared cover. Term life for them only if someone still depends on their income.
• Anyone with a vehicle: third-party motor cover is compulsory. Own-damage cover is worth keeping while the vehicle is worth more than a few years of premium.