Protecting your money

Life brings surprises: illness, accidents, loss of a job, damage to a home. They can cost a lot. Protection means guarding your income, savings and belongings against such risks.

Insurance is a legal contract. You pay a regular amount, the premium, to an insurance company; in return, it pays compensation for losses covered by the policy. A family might pay Rs 500 a month for health insurance; if someone needs hospital treatment, the insurer pays a large part of the bill, so the family's savings are not wiped out.

Learn the words in pairs: the insurer (the company) and the insured (you); the premium (what you pay) and the compensation (what you get when a covered loss happens).

How can it afford to pay? Insurance works on risk sharing. Many people pay premiums into one common pool; only a few suffer a loss in a given year, and they are paid from the pool.

Types of insurance:

• Health: hospital stays, medicines, tests and treatment. The government's Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PM-JAY) gives health insurance cover to eligible low-income families.
• Life: supports the family if the policyholder, perhaps the main earner, dies: daily costs, children's education, loan repayments.
• General: motor (vehicle accidents), property (fire, theft, flood, earthquake), crop (natural disasters, pests and even falling market prices) and cattle (death or disability of animals).

Borrowing and credit. Sometimes people borrow from banks, relatives or others. A loan is useful for productive purposes, like an education loan for college, but borrowing for unnecessary things can create a debt burden. Debt is money owed to someone. Borrow only when needed, and only what you can repay on time.

EMIs. An EMI (equated monthly instalment) is a fixed monthly payment to repay a loan, part principal and part interest. A family buys a Rs 30,000 fridge with an EMI of Rs 3,000 for 12 months: it pays Rs 36,000 in all, Rs 6,000 more than the price, in exchange for having the fridge now. Too many EMIs, though, eat into savings and the emergency fund.