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.
Premium loading
Since tax saving
Plans 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 focusing 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.
Lock-in period
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.
[Source: http://blog.hdfclife.com/factors-that-impact-your-decision-to-buy-insurance]
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