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None of us know exactly what the future holds for us. Emergencies such as illness, accidents, and even death, do not knock the doors rather they arrive quite suddenly and unexpectedly. Here, insurance plays a major role as it protects you and family, financially, in case of the occurrence of any such unfortunate events.
Let’s take a closer look at what insurance is, its plentiful benefits, and also the types of insurance available in India.
What Is Insurance?
Insurance is a legal contract between the insured (individual or company who take the policy) and the insurer (company which provides insurance), where the latter pays the specific amount of money to the former, in case any unfortunate event or crisis arises such as sudden demise, accidental injuries, damage to vehicle or house, etc.
To avail the benefits of insurance, the insured is supposed to pay a regular amount of money to the insurer, which is known as “premium”. “Premium” is described as a predefined amount which is borne by the policyholder to receive a certain amount of insurance coverage. It is a kind of fee that can be paid at one go, or on a monthly, quarterly, half-yearly or yearly basis, during the premium payment term of the insurance policy.
Simply put, the concept of insurance is very elementary. When you possess something valuable that you cannot afford to pay if it gets lost or damaged, then you are required to take insurance. By paying for insurance, you certainly receive that peace of mind that if something goes wrong, the insurance company will mitigate the loss without impacting your finances.
Key Takeaways
- Insurance is a legal agreement between two parties – the insurer and the insured.
- The insurer offers financial coverage to the insured for the losses that they might bear under certain unfortunate events or circumstances.
- The insured pays a certain amount called ‘premium’ to the insurer against which the former receives the insurance cover.
How Does Insurance Work?
Insurance is one of the most effective ways of shielding yourself and your family from a financial loss which could rip off your entire lifetime savings. To get this work, the insured and the insurer get into a legal contract for the insurance policy.
This insurance policy spells out clearly about the various terms, and conditions under which the insurance company is required to pay out the coverage either to the policyholder or their beneficiaries. So, in case of any unfortunate demise or other eventualities, the insured or beneficiary can file a claim with the insurance company. And, based on their final approval, the insurer settles the claim.
As stated above, the policyholder is required to pay a certain amount of premium on a recurring basis to receive the insurance coverage. The higher the sum assured the lesser is the premium.
The insurance provider provides a high insurance against a trivial amount of premium as very few insured actually end up claiming the insurance. This is the reason why insurance companies take this risk and offer you a high amount of coverage at a low price. Also, the insurance company has numerous clients and all of them pay premiums. It is to be noted that not every policyholder faces loss at the same time.
What Are The Main Types of Insurance Policy?
Insurance in India can be broadly divided into the following two categories:
Life Insurance
As the name suggests, life insurance is a policy which one takes on their life. The policyholder purchases a life insurance policy, so that their dependents get financial back-up or security, even if you are not there.
Life insurance becomes extremely important especially when you are the sole breadwinner of your family. Under life insurance, the policyholder’s entire family is compensated financially in case if the policyholder dies during the term of the policy. There are several variants of life insurance policies like term insurance, endowment plans, retirement policy, children plan or unit-linked investment or ULIPs plans. Certain plans only offer death benefits and some also provide maturity and survival benefits along with just life coverage. Infact, plans like investment plans also allow you to create a saving corpus for the long-term goals along with life coverage.
General Insurance
On the other hand, general insurance are the non-life insurance policies wherein the insurance provider protects your valuable assets from burglary, fire or any such unfortunate events. Below mentioned are the different types of general insurance policies:
- Health Insurance: Just like other valuable assets, health is the most crucial aspect of anyone’s well-being. Thus, it is very important to cover health under insurance as it helps in providing financial assistance if something serious happens to the policyholder. In India, all the general insurers provide a wide range of health insurance policies for individuals and entire families. Health insurance policies tend to cover any unexpected hospitalization expenses, medical bills, ambulance cost, room and nursing expenses, pre-and post- hospitalization costs, critical illnesses and personal accidental death and disabilities.
So, if there is any illness in your family then you can be insured easily through a comprehensive health insurance policy. - Motor Insurance: As the name suggests, the motor insurance policy covers your bike or car or any commercial vehicle from any third-party liabilities and also damages, which are caused to your vehicle from burglary, accident, collision or any man-made or natural calamities. Selecting the right vehicle insurance policy ensures complete protection for your vehicle, which can be further customized by using select add-ons to get enhanced coverage.
Also, as per the Motor Vehicles Act, it is mandatory in India for every vehicle to have a minimum third-party insurance cover.
- Home Insurance: Home insurance is also another kind of general insurance which protects your entire home and its various contents also. Whether you are a homeowner or live as a tenant, home insurance policy provides protection to your house from any unfortunate events such as fire, burglary, flood etc.
- Travel Insurance: Travel insurance is really booming in India as a lot of people have started exploring domestic as well as international destinations. Travel insurance policy is helpful as it covers any financial loss due to lost luggage or lost passport and most importantly, any kind of hospitalization emergencies while you are traveling away from home.
Note: If you purchase more than one kind of policy from the same insurer, then always ask for higher coverage at more discounts for each and every policy.
What are the Benefits of Purchasing an Insurance Policy?
- Protection: There is no doubt about that buying an insurance policy does not only provide a safety net to you but your entire family. The insurance provider is liable to compensate you or your dependents the predetermined amount of coverage amount at the time of unforeseen contingencies and also keep your family protected even in your absence.
- Long-term savings: It is important to consider insurance not only for your protection but at times it also helps in building long-term wealth. So, if you are seeking to create long-term savings, then suitable insurance products might help you to save in a disciplined manner and thus build a corpus for your future.
- Higher Coverage at Low-Cost Premiums: Insurance is the only tool which helps you compensate for the loss or damage financially, when something goes wrong with you and your valuable assets. The best part about insurance is that it can be easily obtained at a low cost and ensures higher coverage. The higher the coverage the lesser is the premium and the earlier you start, the less expensive it is.
- Premium Payment Flexibility: The premium amount which you paid for receiving the insurance coverage can be given to the company as per your convenience. The policyholder has the full liberty and thus can choose to pay premiums monthly, semi-annually, or annually. There are also several insurance policies which allow the policyholder to pay as a single premium payment option.
- Save Tax: The premium that you pay for insurance policies can help you save money on taxes under Section 80D, Section 80C and Section 10 (10D) of the Income Tax Act. However, it is to be noted that the tax advantages are based on existing tax regulations, which are subject to change.
“Insurance is the foundation of financial planning.”
Buvanesh
Insurance Policy Terms You Should Know
- Premium: Premium is the predetermined amount which is paid by the policyholder to avail the benefits of the insurance policy. It is a kind of recurring fee that the insured person has to pay to their insurer. The frequency of paying the premium is different as the premium can be paid monthly, quarterly, semiannually, annually or you can pay it all at once, in a single payment.
- Policy Term: It refers to the number of years for which the policy and the policy benefits are active. Policy term is the time period between the issue date and the maturity date.
- Additional Riders: Add-on riders are optional in nature and help to enhance the coverage on the payment of additional premium. Riders such as accidental death coverage, may incur an additional premium when choosing additional benefits.
- Due Date: Due date is the date by which the premium has to be paid to the company. It is calculated from issuance date and also depends on the premium mode chosen. It is important to know the “due date” as if the insurance premium is not paid within the prescribed grace period, the policy lapses or becomes paid up.
- Deductible: It refers to that amount which is borne by the policyholder and not the insurance company. In other words, the insurance company pays if the claim amount is more than the deductible paid.
- Co-payment: Co-payment is an important clause of a health insurance policy. It refers to that part of medical expenses (usually a fixed percentage) that the insured agrees to bear irrespective of the claim amount.
- Annuity: It refers to that part of the amount which is paid at regular intervals throughout the life of the policyholder until their death.
Bottom Line
As a responsible individual, it is crucial to have a necessary insurance policy at place. It is important to research about each insurance product as per your needs and requirements before just buying them. However, taking the help of a financial advisor can certainly help you to make right decisions on type of policy and insurance coverage.
Furthermore, purchasing an insurance policy nurtures the practice of saving money on a regular basis, which in turn enables you to amass a sizable portfolio.
