Micro insurance is one of the financial products that microfinance institutions (MFIs) offer. MFIs provide financial services to people who normally have no access to traditional finance. People excluded from regular banking services are farmers, the poor, and often women.
Micro insurance is like non-micro insurance in that it helps guard you against risk. The difference between micro insurance and its traditional counterpart is in the size of the premium and the actual amount of insurance. The insurance premium is the amount of money an individual or group must pay for insurance. Micro insurance is more accessible because the premiums are much lower, but the flip side of this is that you receive less insurance in the event of an accident or other unforeseen event.
WHICH INSURANCE POLICIES ARE ESSENTIAL?
Some micro insurance policies are essential for everyone, especially small businesspeople and entrepreneurs. These policies are insurance for long-term disability and life insurance. While most people are fortunate enough to never have a long-term disability, it is worth protecting yourself against the risk of it anyway. Without insurance, you may struggle to continue your current lifestyle or sustain your business in the case of a severe disability stopping you from working. Meanwhile, life insurance is important if you want to protect your loved ones from financial harm. If you do not have life insurance, your family may face financial hardship in the event of an untimely death, especially if you have not saved enough for the future.
MICRO INSURANCE AND AGRICULTURE
Certain people have to take out more micro insurance than others. Micro insurance is particularly important for farmers, for example. This is due to the nature of working on a farm. Farming is much more dependent on factors outside of your control like the weather. Long droughts or heavy rain can destroy the year’s harvest. Worse, natural disasters like floods may ruin an entire farm. Unfortunately, as a result of climate change, natural disasters are becoming more frequent and severe. This makes insurance against extreme weather events even more necessary.
Of course, the likelihood of a particular weather event occurring depends on where you live. If your farm is well above sea level or if there is no history of flooding in your area, then it may not be necessary to get flood insurance, for instance. If you are unsure what to guard yourself against, it is best to seek expert advice before wasting any money.
WHY YOU CANNOT AFFORD TO WAIT
Some people believe there is no point in getting insurance against floods or other extreme weather events because you can seek help afterwards. This attitude is very costly, however. This is because credit becomes far more expensive in the event of a natural disaster. Far more people default on their loans because their harvests or even entire farms are destroyed. To default on a loan means being completely unable to pay any of the loan back within the agreed time period. More people defaulting means microfinance institutions will either charge higher interest rates, because they perceive the risk of a future default to be higher, or they simply stop lending money. For this reason, it is highly risky to be uninsured.