Which types of insurances do I need to buy?
"Evaluate if the Rs 5 million term insurance is sufficient. Typically the term insurance provided by employer is in the range of 1 to 3 times the gross. Generally one should be covered in the range of 5 to 10 times the Gross. The sooner you start the lesser the premium and you can get insured for a large amount for a long duration at very nominal rate.  NOTE:  You can also buy a health insurance for your father, note these typically come at high cost, generally if over 70 years of age, 25% is the premium amount and 25% as co-pay. So if your dad doesn't fall ill once in 3 years, its a loss making proposition. Edit: Accident insurance best take is along with rider on term plan. Additional Health insurance is a good idea and helps if you are in between jobs. Plus the new company health insurance can reject a particular treatment as ""Pre-Existing"". i.e. certain illness [in certain plans] require one to have coverage for 3 years before the claim for it can be covered." It sounds like you're putting all your extra money into insurances because you feel that one can never have too much insurance. That's a very bad idea, financially. Basically it means you'll end up giving your money away to insurance companies in order to satisfy that feeling. Do realize that the expected value of every instuance is negative: on average, you'll pay more money than you'll receive. Otherwise, insurance companies would go bankrupt, so they are very good at ensuring that they get more in premiums than they pay out. Insurance should only be bought to cover essential risks, things that would ruin you: major health problems, death (to cover dependants), disability, liability. For everything else, you should self-insure by saving up money (up to a few months' wages) and putting it into safe and liquid investment vehicles as an emergency fund. That way, you are much more flexible, don't pay for the insurance company's employees, fancy offices and profits, and may even earn some interest. Can you afford to replace your home if it suffers major damage in a fire or earthquake?  Is your home at risk of flooding?  In the United States, one can purchase insurance for each of these risks, but the customer has to ask about each of them.  (Most default American homeowners policies cover fire and wind damage, but not earthquake or flooding.  I am not sure about hurricane or tornado damage.) Your most cost-effective insurance against fire, earthquake, or flood damage is to prevent or minimize such damage.  Practical measures cannot completely eliminate these risks, so homeowners' insurance is still a good idea (unless you are so rich you can easily afford to replace your home).  But you can do things like: Your most cost-effective health insurance is to have clean water, wash your hands before handling food, eat healthily (including enough protein, vitamins, and minerals), exercise regularly, and not smoke.  Your medical insurance can cover some of the inevitable large medical expenses, but cannot make you healthy.
A derivative is a financial instrument of a special kind, the kind “whose price depends on, or is derived from, another asset”.  This definition is from John Hull, Options, Futures and Other Derivatives – a book definitely worth to own if you are curious about this, you can easily find old copies for a few dollars. The first point is that a derivative is a financial instrument, like credits, or insurances, the second point is that its price depends closely from the price of something else, the mentioned asset. In most cases derivatives can be understood as financial insurances against some risk bound to the asset. In the sequel I give a small list of derivatives and highlight the assets and the risk they can be bound to.  And first, let me point out that the definition is (marginally) wrong because some derivatives depend on things which are not assets, nor do they have a price, like temperature, sunlight, or even your own life in the case of mortgages.  But before going in this list, let me go through the remaining points of your question. What is the basic idea and concept behind a derivative? As already noted, in most cases, a derivative can be understood as a financial insurance compensating from a risk of some sort.  In a classical insurance contract, one party of the contract is an insurance company, but in the broader case of a derivative, that counterparty can be pretty anything: an insurance, a bank, a government, a large company, and most probably market makers. How is it really used, and how does this deviate from the first point? Briefly, how does is it affecting people, and how is it causing problems? An important point with derivatives is that it can be arbitrarily complicated to compute their prices.  Actually what is hidden in the attempt of giving a definition for derivatives, is that they are products whose price Y is a measurable function of one or several random variables X_1, X_2, … X_n on which we can use the theory of arbitrage pricing to get hints on the actual price Y of the asset – this is what the depends on means in technical terms.  In the most favorable case, we obtain an easy formula linking Y to the X_is which tells us what is the price of our financial instrument. But in practice, it can be very difficult, if at all possible, to determine a price for derivatives. This has two implications: Persons possessing sophisticated techniques to compute the price of derivatives have a strategic advantage on derivatives market, in comparison to less advanced actors on the market. Organisation owning assets they cannot price cannot compute their bilan anymore, so that they cannot know for sure their financial situation. They are somehow playing roulette. But wait, if derivatives are insurances they should help to mitigate some financial risk, which precisely means that they should help their owners to more accurately see their financial situation! How is this not a contradiction? Some persons with sophisticated techniques to compute the price of derivatives are actually selling complicated derivatives to less knowledgeable persons.  For instance, many communes in France and Germany have contracted credits whose reimbursements have a fixed interest part, like in a classical credit, and a variable interest part whose rate is computed against a complicated formula involving the value of the Swiss frank at each quarter starting from the inception of the credit.  (So, for a 25 years running credit of theis type, the price Y of the credit at its inception depends on 100 Xs, which are the uncertain prices for the Swiss frank each quarter of the 25 next years.)  Some of these communes can be quite small, with 5.000 inhabitants, and needless to say, do not have the required expertise to analyse the risks bound to such instruments, which in that special case led the court call the credit a swindling and to cancel the credit.  But what chain of events leads a 5.000 inhabitants city in France to own a credit whose reimbursements depends on the Swiss frank?  After the credit crunch in 2007 and the fall of Lehman Brothers in 2008, it has begun to be very hard to organise funding, which basically means to conclude credits running long in time on large amounts of money.  So, the municipality needs a 25 years credit of 10.000.000 EUROS and goes to its communal bank.  The communal bank has hundreds or thousands of municipalities looking for credits and needs itself a financing.  So the communal bank goes to one of the five largest financial institutions in the world, which insists on selling a huge credit whose reimbursements have a variable part depending on hundred of values the Swiss frank will have in the 25 next years. Since the the big bank has better computation techniques than the small bank it makes a big profit.  Since the small bank has no idea, how to compute the correct price of the credit it bought, it cuts this in pieces and sell it in the same form to the various communes it works with.  If we were to attribute this kind of intentions to the largest five banks, we could ask about the possibility that they designed the credit to take advantage of the primitive evaluation methods of the small bank. We could also ask if they organised a cartel to force communal banks to buy their bermudean snowballs. And we could also ask, if they are so influent that they eventually can manipulate the Swiss frank to secure an even higher profit.  But I will not go into this.  To the best of my understanding, the subprime crisis is a play along the same plot, with different actors, but I know this latter subject only by what I could read in French newspapers. So much for the “How is it causing problems?” part. What is some of the terminology in relation to derivatives (and   there meanings of course)? Answering this question is basically the purpose of the 7 first chapters of the book by Hull, along with deriving some important mathematical principles.  And I will not copy these seven chapters here! How would someone get started dealing in derivatives (I'm playing a     realistic stock market simulation, so it doesn't matter if your     answer to this costs me money)? If you ask the question, I understand that you are not a professional, so that your are actually trying to become the one that has money and zero knowledge in the play I outlined above. I would recommand not doing this.  That said, if you have a good mathematical background and can program well, once you are confindent with the books of Hull and Joshi, you can have fun implementing various market models and implementing trading strategies. Once you are confident with this, you can also read the articles on quantitative finance on arXiv.org. And once you are done with this, you can decide for yourself if you want to play the same market as the guys writing these articles. (And yes, even for the simplest options, they have better models than you have and will systematically outperform you in the long run, even if some random successes will give you the feeling that you do well and could do better.) (indeed, I've made it a personal goal to somehow lose every last cent of my money) You know your weapons! :) Two parties agree today on a price for one to deliver a commodity to the other at some future instant.  This is a classical future contract, it can be modified in every imaginable way, usually by embedding options.  For instance one party could have the option to choose between different delivery points or delivery days. Two parties write today a contract allowing the one party to buy at some future time a commodity to the the second party.  The price is written today, as part of the contract.  (There is the corresponding option entitling the owner to sell something.)  Unlike the future contract, only one party can be obliged to do something, the other jas a right but no obligation. If you buy and option, your are buying some sort of insurance against a change of price on some asset. This is the most familiar to anybody.  Credits can come in many different flavours, especially the formula to compute interests, or also embed options.  Common options are early settlement options or restructuration options. While this is not completely inutitive, the credit works like an insurance.  This is most easily understood from the side of the organisation lending the money, that speculates that the ratio of creanciers going bankrupt will be low enough for her to make profit, just like a fire insurance company speculates that the ratio of fire accidents will be low enough for her to make a profit. This is like a mortgage on a financial institution.  Two parties agree that one will recive an upfront today and give a compensation to the second one if some third party defaults. Here this is an explicit insurance against the unfortuante event, where a creancier goes bankrupt. One finds here more or less standard options on electricity. But electricity have delicious particularities as it can practically not be stored, and fallout is also (usually) avoided. As for classical options, these are insurances against price moves. A swap is like two complementary credits on the same amount of money, so that it ends up in the two parties not actually exchanging the credit nominal and only paying interest one to the other — which makes only sense if these interests are computed with different formulas. Typical example are fixed rate vs. EURIBOR on some given maturity, which we interpret as an insurance against fluctuations of the EURIBOR, or a fixed rate vs. the exchange ratio between two currencies, which we interpret as an insurance against the two currencies decorrelating. Swaps are the richest and the most generic category of financial derivatives.  The off-the-counter market features very imaginative, very customised insurance products. The most basic form is the insurance against drought, but you can image different dangers, and once you have it you can put it in options, in a swap, etc.  For instance, a restaurant with a terrasse could enter in a weather insurance, paying each year a fixed amount of money and becoming in return an amount of money based on the amount of rainy day in a year. Actually, this list is virtually without limits! "Yes, you can insure against the fall in price of stock by purchasing a put option.  You pay for a put and if the price of the share falls below the ""strike price"" of the put, then you can exercise the put.  On exercise, the person who sold you the put contract agrees to buy the stock for the strike price, even though that strike price is higher than the market price.  You can adjust the level of insurance by buying put options at higher or lower prices, or buying fewer put options than shares you own (leaving some shares uninsured). Alternatively, you can minimize your risk exposure by investing in an index or other fund, which gives you partial ownership in a large number of shares.  That means on any given day, lots of shares do worse and lots of shares do better.  You can reduce the need for insurance by purchasing a lower-risk, lower-growth financial product." It's actually quite simple. You're actually confusing two concept. Which are taking a short position and short selling itself. Basically when taking a short position is by believing that the stock is going to drop and you sell it. You can or not buy it back later depending on the believe it grows again or not. So basically you didn't make any profit with the drop in the price's value but you didn't lose money either.  Ok but what if you believe the market or specific company is going to drop and you want to profit on it while it's dropping. You can't do this by buying stock because you would be going long right? So back to the basics. To obtain any type of profit I need to buy low and sell high, right? This is natural for use in long positions. Well, now knowing that you can sell high at the current moment and buy low in the future what do you do? You can't sell what you don't have. So acquire it. Ask someone to lend it to you for some time and sell it. So selling high, check.  Now buying low? You promised the person you would return him his stock, as it's intangible he won't even notice it's a different unit, so you buy low and return the lender his stock. Thus you bought low and sold high, meaning having a profit. So technically short selling is a type of short position. If you have multiple portfolios and lend yourself (i.e. maintaining a long-term long position while making some money with a short term short-term strategy) you're actually short selling with your own stock. This happens often in hedge funds where multiple strategies are used and to optimise the transaction costs and borrowing fees, they have algorithms that clear (match) long and short coming in from different traders, algorithms, etc. Keep in mind that you while have a opportunities risk associated.  So basically, yes, you need to always 'borrow' a product to be able to short sell it. What can happen is that you lend yourself but this only makes sense if: Insurance is for events that are both and Unexpected and, for many people, catastrophic events are, for example, sickness, disability, death, car accidents, house fires, and burglaries, for which you may buy health, disability, life, auto, home, and renter's insurance.  It may be catastrophic for a family relying on a very old earner for that earner to die, and you can buy life insurance up to a very old age, but the premiums will reflect the likelihood of someone of that age dying within the covered period.  The more expected an event is, the more anything referred to as insurance is actually forced savings. Health insurance with no copays on regular checkups expects the insured to use them, so the cost of those checkups plus a profit for the insurance company is factored into the premiums ahead of time.  A wooden pencil breaking may be unexpected. Regardless of foreseeability, no one buys insurance on wooden pencils, as the loss of a pencil is not catastrophic. What is catastrophic can be context dependent. Health-care needs are typically unforeseeable, as you don't know when you'll get sick. For a billionaire, needing health-care, while unforeseeable, the situation would not be catastrophic, and the billionaire can easily self-insure his or her health to the same extent as most caps offered by health insurance companies. If you're on a fixed budget buying a laptop, if it unexpectedly failed, that would be catastrophic to you, so budgeting in the cost of insurance or an extended warranty while buying your laptop would probably make sense. Especially if you need that $2000 laptop, spending an extra 17.5% would safeguard against you having to come out of pocket and depleting your savings to replace it, even though that brings you to a grand total of $2350 before taxes. However, if you're in that tight of a situation, I would strongly recommend you to find a less expensive option that would allow you to self-insure. If you found a used laptop for much less (I can even see Apple selling refurbished Macs for less than $1000) you might decide that your budget allows you to self-insure, and you could profit from being careful with your hardware and resolving to cover any issues with it yourself. "First off, the jargon you are looking for is a hedge. A hedge is ""an investment position intended to offset potential losses/gains that may be incurred by a companion investment"" (http://en.wikipedia.org/wiki/Hedge_(finance)) The other answers which point out that put options are frequently used as a hedge are correct. However there are other hedging instruments used by financial professionals to mitigate risk.  For example, suppose you would really prefer that Foo Corporation not go bankrupt -- perhaps because they own you money (because you're a bondholder) or perhaps because you own them (because you're a stockholder), or maybe you have some other reason for wanting Foo Corp to do well. To mitigate the risk of loss due to bankruptcy of Foo Corp you can buy a Credit Default Swap (http://en.wikipedia.org/wiki/Credit_default_swap). A CDS is essentially a bet that pays off if Foo Corp goes bankrupt, just as insurance on your house is a bet that pays off if your house burns down.   Finally, don't ever forget that all insurance is not just a bet that the bad thing you're insuring against is going to happen, it is also a bet that the insurer is going to pay you if that happens.  If the insurer goes bankrupt at the same time as the thing you are insuring goes bad, you're potentially in big trouble." It's really not possible to know what your best investment strategy is without knowing more about you, which isn't the place of a site like this. However I'll make some general comments about insurance policies as savings. Insurance policies are extremely inflexible. They lay down specific payments, and specific returns that you will get back. However typically if you don't follow the shcedule of payments laid down, you will lose almost all the benefit of the investment. Since you say you are a beginner, I'll assume you are young too. Maybe in a few years you will want to buy a house, or a nice car, or get married, or put money into some other investment opportunity. If you are committed to making  insurance policy payments you will have less available for the other things you want to do. Related to this is the 'estimated returns'. You say the 'nonguaranteed bonus is around 3.75%-5.25%'. But because an insurance policy locks you in, if it turns out that it's the low end of that - or worse - you can't get out, even if other investments are outperforming it. As you haven't specified country, will try and answer more in general ... Whole Life Insurance but it seems to be the first thing any financial adviser is trained to sell ... The commission structure is such that it makes more attractive for a financial adviser to sell Whole Life. Plus for most buyers its easier to sell Whole Life compared to Term. The way Guarantees are worded differ from Policy to Policy, most of them DO NOT give any Guarantee, its the Adviser misquoting. Where there is Guarantee, it would be similar to a Interest on Bank Deposit / Debt fund. Plus there are various terms used in the Policy, the Guarantee may not be on Sum Assured, but on the Policy Value that would be low. In essence, you are right on investing the difference into any save instruments like Bank Deposits, Certain Debit Funds, Government Bonds, Retirement funds etc that would essentially give you more returns than whats promised in the Whole Life Policy. Insurance isn't an investment.  It's a hedge against your untimely death, and is meant to replace the potential income that will be lost by not having you there to provide for your family. Buy term, and invest the difference.  Traditional investments will outperform the insurance fund, as well as offering more flexibility.