Financial Protection

Financial protection refers to the possession of the capacity to respond to liabilities and contingencies. It includes the ability to respond to damages that happen in the near or far future and cover costs involved in investigating and settling suits with regard to them.

Protection in financial aspects often requires insurance as a means to fund the requirements. A protection cover ensures that people have assets or money to cover expenses, emergencies, and even retirement. This helps individuals and businesses to lead with comfort and without concern about facing contingencies. It helps them be better prepared.

Financial protection refers to the act of securing or protecting income and assets from unforeseen events. It helps secure one's financial future against unexpected events such as unemployment, illness, etc. The protection chosen, hence, has to be accommodative of the changing circumstances through the course of life, be it an individual or a business. Individuals require protection to safeguard their income, life savings, family, and assets. Businesses need it to survive cycles of generating income.

To choose financial protection instruments, knowledge of having appropriate risk information, ownership, discipline, cost of capital knowledge, and timeline estimation. Risk information helps one estimate the underlying price of risk and understand the cost and benefits involved in reducing these risks. Having ownership helps in understanding who the liability falls on, and this helps them avoid delays in response and recovery. It helps in better planning and budgeting.

Discipline helps with planning and maintaining consistency in building a solid plan. It also helps with budget mobilization and execution. Estimating the cost of capital is important in responding effectively to situations. It helps in choosing the best instrument. Similarly, being aware of the timeline helps in understanding the instrument required and the interval needed to respond appropriately.

Given below are the types of coverages available:

• Redundancy Cover: These plans help cover expenses until a person finds a new job if they have lost one. These plans can be beneficial if the jobs lost are not due to sickness or injury, no knowledge of layoffs, etc. They shall also not be retiring, resigning, choosing to let go of the job voluntarily, or even being let go during the probationary period.
• Mortgage Protection Insurance: These plans, also known as home loan insurance and consumer credit insurance, cover mortgage repayments. Mortgage protection insurance typically covers both commercial and residential properties.
• Income Protection Insurance: Income protection insurance, under this, usually covers up to 70% of an individual's monthly income for a specified period. It shall be covered in monthly payments in case of becoming injured or being sick and unable to work. It allows individuals to contribute towards their repayments, paying bills and covering expenses such as groceries and educational fees.
• Critical Illness Covers: These plans help individuals with some sort of income in case of illness. They often come as lump sum amounts rather than regular incomes, which can be later used to cover expenses. The plan, however, does not cover all situations and often requires a diagnosis of the illnesses listed. The coverage differs between providers and the policies chosen.
• Life Insurance Covers: These plans pay a lump sum on an individual's death. They provide peace of mind for dependent family members, helping them cover expenses and receive retirement income. They also provide financial security in difficult times.

Below are some of the examples that help us understand the topic better:

Example #1

Imagine Dan is a middle-aged salaried employee. He is aware of the climate crises and economic challenges and hence decides to take out health insurance and redundancy cover as precautions. Dan approaches an insurance company that provides financial protection services. Health insurance helps him cover unforeseen expenses due to various factors. It helps him cover medical costs, doctor fees, prescription fees, etc.

Similarly, economic crises can result in layoffs. Redundancy coverage can help him cover his daily expenses in case he loses a job later. After a few years, he decides to retire at the age of 65 and wants to start a retirement plan in addition to the existing financial protection services he has chosen. This would help his money accumulate and be invested so that he, in his old age, can use the money to cover expenses without working.

Example #2

Reports suggest that northern Central American farmers face a significant threat of poverty due to their reliance on rain-fed agriculture. The rising temperatures of the globe make them unreliable and vulnerable. They need access to financial protection systems or tools such as insurance and credit services. Guatemala has introduced a parametric insurance program to bring financial protection services to the people. It aims to provide index-based insurance and cover them in case of excess rain and drought. They are devoid of high operational costs, unlike traditional insurance policies. This program, along with broad inclusion initiatives, can provide farmers with a strong financial protection system.

Below are some of the benefits:

• Provide individuals with peace of mind as there is a safety net in place for emergencies.
• Offers financial stability to individuals and businesses in times of hardship. 
• Help in mitigating risks and protect oneself from financial risks.
• Planning through financial protection insurance helps in gaining access to healthcare services without monetary strain.
• They are a source of income replacement and retirement.
• They provide family security, property protection, and investment protection. They also provide financial and legal security through institutions such as consumer financial protection.
• Ensure business continuity even in the face of unforeseen events.
• It helps make better logical decisions as they provide a safety net.
• Helps in the achievement of financial goals.