Basics of Insurance

The Definition

Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for a consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.

The party bearing the risk is known as the 'insurer' and the party whose risk is covered is known as the 'insured'.

How Insurance works

The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

Insurance provides security and safety

The insurance provides safety and security against the loss on a particular event. In case of life insurance payment is made when death occurs or the term of insurance is expired. Similarly, the property of insured is secured against loss on a fire in fire insurance.

Insurance protects mortgaged property

It is the practice of the lender to insure their loan against any untoward incidents that may happen to the mortgagee. This provides adequate amount to the dependents in case of an early death of the property owner to pay off the unpaid loans. Similarly, the mortgagee gets adequate amount at the destruction of the property.

Insurance eliminates dependency

In case of an untoward happening to the husband or father, the destruction of family needs no elaboration. Similarly, at destruction of property and goods, the family would suffer a lot. The insurance is here to assist them and provides adequate amount at the time of sufferings.

Life insurance encourages saving

The elements of protection and investment are present only in life insurance. In property insurance, only protection element exists. In most of the life policies elements of saving predominates. These policies combine the programs of insurance and savings. The saving with insurance has certain extra advantages i) systematic & compulsory saving ii) the deposited premium cannot be withdrawn easily. iii) In case of a risk incidence, the insurance will pay the policy money irrespective of the premium deposited iv) certain kind of insurance premium are tax exempted.

Achieving Financial Freedom

 

Financial freedom is a term to describe the state of having sufficient wealth to live indefinitely without having to work actively for basic needs. Basically, one should have enough earning assets which would give an income that would be sufficient to meet the expenses on basic needs.

Every one wants to achieve such freedom. The following are two approaches in achieving financial independence.

1.       Accumulate income generating assets until such income surpasses living/liability expenses.

2.       Accumulate enough liquid assets which would sustain all future living/liability expenses.

To achieve the above goals, it is important to practice certain basics of wealth building principles.

1.      Maximize the earnings

This can be either through employment or through a business. It goes without saying that if we do not make any effort to earn as much as we can, we will never attain the financial freedom that we desire. While we may earn what we think is small in the beginning, we should make effort to excel at work, go back to school to increase our knowledge and actively manage our career so that our earnings increase steadily over time.

2.      Spend Less Than the Earnings

This is the best principle to achieve true financial freedom. Our expenses also grew along with the earnings. What is required is to increase the earning faster than the increase in expenses.

3.      Control the Debt

In this era of credit cards and easily accessible loans, it is easy to succumb to the allure of an easy life financed by debt. Borrowing to spend should be the last option, once should indulge in. Not all debt is bad, but uncontrolled high interest loans should be avoided.

4.      Invest regularly

We should cultivate the habit of investing a portion of the earnings regularly in stocks, unit trusts, bonds, etc. This should commence at an early stage of one’s carrier. The amount available for investment in the beginning may be small but important thing is to make a beginning and then slowly increase the level of one’s investments as their earnings grow. Set a goal for investment. The goal should be realistic and in sync with the earning potential.

5.      Make your money works for you

This is the outcome of principle 4. A regular saving would accumulate good amount of corpus. What is required is a wise way of investment in various financial products. At some point, these investments would start earning itself. Over a period, the earnings from these investments by way of interest, dividends and capital appreciation will grow faster and faster.

To conclude, if one follows the above golden principles of wealth creation, one can surely achieve the financial freedom.

Developing Self discipline

 

 Self discipline is a type of selective training, creating new habits of thought, action and speech towards improving ourselves and reaching goals. Self discipline can be developed by practice. If one wants to get up early in the morning say 5 am, what is required is to make a beginning tomorrow. Research says that anything practiced continuously for 21 days, would become a habit.

The following are some traits to develop self-discipline:

Self Knowledge

Discipline means behaving according to what we have decided is best, regardless of how we feel in the moment. Therefore the first trait of discipline is self-knowledge. We need to decide what behavior best reflects our goals and values. This process requires introspection and self-analysis. It is highly recommended to write out the goals, dreams and ambitions. Even better, if we write a personal mission statement. It is found that writing such a statement results in greater understanding of who we are, what we are about and what we value.

Awareness

Self-discipline depends upon conscious awareness as to both what we are doing and what we are not doing. As we begin to build self-discipline, we may catch ourselves in the act of being undisciplined – e.g. biting nails, avoiding the morning walk, checking emails constantly. Developing self-discipline takes time and the key here is we are aware of our undisciplined behavior. With time this awareness will help us in disciplining ourselves. This also gives the opportunity to make a decision that is in better alignment with our goals and values.

 

Commitment

It is not enough to simply write our goals and values. We must make an internal commitment to them. Otherwise when the alarm clock goes off at 5am we will see no harm in hitting the snooze button for “just another 5 minutes”. Further, it is highly recommended to put in place a system to track these commitments. As the saying goes, “What gets measured gets improved”.

 

Courage

Self-discipline is often extremely difficult. Moods, appetites and passions can be powerful forces to go against. Therefore self-discipline is highly dependent on courage. Don’t pretend something is easy for you to do when it is in fact very difficult and painful. Instead, find the courage to face this pain and difficulty. As we begin to taste small victories, our self-confidence will grow and the courage that underpins self-discipline will come more naturally.

 

Self Coaching

Self-talk may be harmful but it can also be extremely beneficial if we have control of it. When we find ourselves being tested, it is suggested that we should talk to ourselves, encourage ourselves and reassure ourselves. After all, it is self-talk that has the ability to remind us of our goals, call up courage, reinforce the commitment and remind about the task at hand. “The price of discipline is always less than the pain of regret”. Let us keep this quote in our memory and recall whenever we are being tested. It would surely change our lives.

A disciplined life will surely improve the way we think, the way we behave, the way work and the way we achieve the goals.