Table of Contents
Insurance policies are a great way to protect yourself and family from unplanned emergencies. Read on to know about its benefits and the types of insurance.
In times when you are stuck in financial turmoil—whether it's due to a huge hospital bill that burns a hole in your pocket or even because your new car met with an ugly accident—that’s when you need to know what insurance is and how to use it
India has around 57 insurance companies—24 are from the life insurance section, and the rest are non-life insurers. LIC is one of the most well-known public sector life insurance providers, and there are 6 public companies that provide non-life insurance.
Other than these, there is a single re-insurer corporation in India, namely the General Insurance Corporation of India.
Other stakeholders in the Indian insurance market include individual agents, corporate agents, brokers, etc.
What is Insurance?
Insurance coverage, or simply insurance, is an agreement between two parties- the insurer (the insurance provider company or agent), and the insured (the person holding the policy) that is based on financial protection.
This financial protection policy is aimed at eliminating the financial risks involved in uncertain circumstances and provide a sense of financial security.
The policyholder pays a certain amount to the insurer at specified time intervals against the insurance coverage that the insurer provides. Through these payments, called the premiums, the insurer assures the policyholder it will provide reimbursements and eliminate losses as abided by certain terms and conditions.
The assured sum is decided from the premiums itself and hence premiums are often called “policy limits”.
Is "deductible" a type of premium payment?
If you have bought an insurance policy in the past, you may have noticed that for certain insurance policies, the premium is less than what you anticipated it to be.
This happens because some insurance companies follow these "less premium” schemes in order to incentivize people to buy their policies. It has a positive impact as people are generally attracted to such policies and hence invest their money in the right direction.
However, this does not mean that the insurer will let the rest of the amount go in vain and give you the assured sum.
It is only after you pay the leftover money or the deductible that you will get your promised amount back.
Therefore, as compensation for taking low premiums from you, the insurer companies and agents will charge a higher deductible from you—in the end, the calculations turn out to be similar to an insurance policy with higher premiums.
Here are a few benefits and features Insurance Policies:
An insurance policy will hedge your finances against any future catastrophe, if nothing else. If you buy insurance today, you are basically decreasing the risk involved in your future transactions or financial planning.
2. Risk sharing
With insurance, it is not assured that the risk involved is completely mitigated. But, it assures you that if some instability pertains, your finances alone won’t be going down — you’ll be supported by a net of people who are also paying the premium.
3. Risk pooling & nominal fee
In an insurance company, various clients pool their risks—they collectively buy insurance and share the premium to be paid. In such a set up, it is common to think that if one person suffers financial loss, others will be impacted too. That’s exactly what happens here.
The loss is financed out of this pooled fund or the accumulated fund. So, the impact on the other people is very minimal, they just have to pay a nominal fee.
4. The coverage
Under insurance, you can cover your health, vehicle, property, etc. There are various types of insurance, and you can claim what you require.
5. Main components
The premiums, the deductible and the assured sum are the three main components of an insurance policy. It is advisable for the policyholder to go through the terms and conditions of the contract before buying it.
The types of insurance policies
Insurance policies cover the risk involved in health expenses, property damages while travelling, vehicle damages, etc. There are two main categories of insurance policies:
- Life insurance
- General insurance
1. Life insurance
One generally avails a life insurance policy to protect their family's financial health in case of premature or untimely death.
When the insured person dies, their family receives a lump sum amount to sustain. In cases where there is only a single breadwinner in the family, life insurance policy is a good option to save the grieving family’s financial conditions.
Life insurance and term insurance- what’s the difference?
Term insurance is a type of life insurance. Under a term insurance policy, you pay a premium for a pre-decided time period, whereas a normal life insurance can be a lifetime premium payment policy.
With a normal life insurance policy, you get the assured sum even if you outlive the tenure – on maturity. If you pass away during the tenure of the term insurance policy, your family gets the assured sum. However, if you survive through it, the amount remains with the insurance company itself.
One reason why people generally prefer normal life insurance over term insurance plans is this fear of losing their money if they outlive the tenure.
Under Section 80C, life insurance coverage plans enjoy certain tax benefits.
Unit Linked Insurance Plans- one step ahead of life insurance policy
A Unit Linked Insurance Plan is the perfect blend of investment and insurance plans.
Basically, it is an investment-cum-insurance plan where the premium plays a dual role of being the insurance coverage and a medium to purchase market-linked equities, debts and other investment instruments. In short, you are enabled to create wealth in addition to being financially secured through a single operation.
2. General insurance
The general insurance policies cover the rest of elements of insurance- the health, property, education, vehicle, etc.
As the name suggests, this policy takes care of health-related expenses.
In a world where pollution and other hazards are leading to new health problems, it has become necessary for each one of us to buy health insurance – for our family and for ourselves. Instead of going bankrupt because of large hospital bills, it is far better to insure yourself against these risks along with maintaining your health.
Some insurance companies have a pre-tie-up with hospitals themselves, and so they directly contact the in-network hospital to carry out a cashless transaction.
If it is not so, you can get reimbursements for your treatment and hospitalisation later on too. Just make sure to check the types of monetary coverage the company is providing you before buying the insurance.
Some companies refrain from insuring chronic illnesses, and therefore it is important for you to check the contract properly as per your requirements before buying an insurance plan.
In order to save your home or any of your property from natural calamities like floods, cyclones, etc, you can buy a property insurance policy. For people living in calamity-prone zones, it is necessary to buy this type of insurance.
In today’s world where everyone is in a hurry, roads are becoming more and more dangerous. One wrong move and you could end up risking your life or even damaging your property.
Thus, it is very important to consider a vehicle insurance policy. It is also mandatory for every vehicle to have a third-party insurance policy, and you need to carry it with you in the vehicle at all times. In addition to the compulsory third-party insurance, you could buy another policy and greatly eliminate future financial upheavals.
If you have ever booked train or flight tickets, you must have noticed an option to buy insurance for minimal costs — this is travel insurance.
Either you can buy it from there or alternatively, you can avail insurance to cover baggage losses, ticket cancellations, etc. especially if you fly often and internationally.
Other types of insurance
There are some other insurance plans in addition to the ones explained above. Some of these are miscellaneous insurance plans for furniture, goods, machines, fire (for the damages caused by fire), and marine insurance (for cargo ships), etc..
The greatest benefit of buying insurance is that it doesn’t allow unprecedented circumstances in life to burn a hole through your pocket. An insurance policy is important not just for yourself but for the financial stability of your family too.
Along with personal risk coverage, insurance also has a huge role to play in the economy of the country, as this insured sum and the premiums that you pay help in credit creation and enable the insurance firms to sell more insurance and keep them functional.
While having insurance is necessary, it is equally important to build an emergency fund that can see you through tough times. If you want more advice on how to effectively allocate your savings into emergency funds, check out this article!
Insurance can be looked upon as a type of investment too, and if you are seeking help for other ways to invest, check out the Jar app. Jar gives you an easy way to kick-start your savings and investment with amounts as low as Rs. 10.
It also has some attractive features, such as daily spins, which allow you to double the amount of investment! Download the Jar app today.