Insurance Meaning – Types, Benefits & How It Works
Insurance is the most effective risk management tool which can protect individuals and businesses from financial risks arising out of various contingencies. The cash loss can at least be covered by insurance, but the emotional and psychological loss will never be made up. Even though there are some uncertainties in life that you cannot control, insurance will undoubtedly assist you to shift the financial risk involved.
What is insurance?
In exchange for the premiums paid by the insured person, the insurance company (the insurer) agrees to pay for financial losses caused by insured eventualities. Insurance is a legal contract between the insurance company (the insurer) and the individual (the insured). Simply put, insurance is a means for transferring risk, allowing you to receive coverage for any financial losses you may incur as a result of unplanned circumstances. Additionally, the premium you pay for this arrangement is referred to as such. Risks ranging from your life to the use of your mobile phones are covered by insurance. Protecting what you consider to be “important” to you is crucial in the end.
How does insurance work?
The idea of insurance operates under the principle of “risk pooling.” You must pay recurring payments (also known as premiums) toward the cost of the insurance when you purchase a specific type of insurance policy from an insurance provider for a predetermined time with a predetermined level of coverage. Similar to this, an insurance company will collect premium from all of its customers (also known as insureds) and combine the funds to pay for losses caused by an insured occurrence. If the covered event occurs and you file a claim, the insurance company will use a pool of premiums paid by policyholders to cover your losses. You won’t receive any benefits if you don’t file a claim within the allotted policy period. However, a variety of items are provided by insurance companies today which also involve savings element attached to it.
What is the deductible in insurance?
The amount of the claim that is paid for by the policyholder is referred to as the deductible. The amount that is subtracted from an insurance policy claim is known as the deductible amount, as the name suggests. For instance, the insurance company will only pay the policyholder INR 20,000 if the agreed deductible is INR 20,000 and the claim amount is INR 40,000. This therefore states that the insurance provider will only reimburse you if the claim amount exceeds the deductible amount.
The premium for a given insurance plan is lower the larger the deductibles are, and vice versa. The feasibility of your future claims is significantly influenced by your deductibles. Therefore, it is essential to give your insurance plan’s deductibles the utmost consideration.
Key features of insurance
Insurance policies are the much-needed support pillar one requires at the time of need. The salient features of insurance are-
- Easy to purchase
One of the features of an insurance policy is its ease of purchase. Due to the widespread use of the internet, people can now easily purchase a policy by sitting in their comfort zone. Most insurance companies provide the option of both online and offline purchases of the policies so people can choose as per their comfort.
- A partner in a financial crisis
The basic purpose of an insurance policy is to provide financial help when in need. Be it health, vehicle, or any other insurance policy, the aim is to extend the monetary aid.
- Abundant options
The current insurance market is full of a number of options. A customer need not stick to a few options. There is great flexibility to surf all the options available and then make the final decision.
- Benefits of insurance
One insurance policy provides a number of benefits. Right from providing financial coverage to tax benefits and so on, insurance cover provides wide coverage.
There are several occasions when the insurance company provide offers for the policyholder. It may be a reduction in the renewal amount or anything as such. No claim bonus is also a happy moment. It is the bonus provided for making no claims in a policy year.
- Insurance for every precious thing
There is the facility of insurance for almost all precious and luxury things. Apart from the life insurance, you can get a cover for your vehicle, home, mobile, jewellery, etc.
- A cover for family
Insurance policies are not limited to covering only one person. When it comes to a life insurance policy, several plans allow a policyholder can get their whole family covered.
- The ease of insurance premium calculator
Almost all the insurance companies provide the easy of insurance premium calculator. An individual can calculate the lumpsum premium he will have to pay in lieu of the insurance cover. It makes it easier for the customers to decide their deal.
Types of insurance available
There are various types of insurance products available in India. Mainly, insurance products are classified as:
- Life insurance products
- General insurance products
You are protected from the possibility of dying through life insurance. There are many different types of life insurance policies, including term, endowment, whole, money-back, and unit-linked investment plans. Numerous life insurance plans combine protection with savings, making them excellent tools for long-term savings. General insurance policies provide coverage for monetary losses brought on by dangers other than death. General insurance policies are available in a variety of forms and cover a wide range of hazards, including health, auto, marine, liability, travel, and commercial risks.
A powerful risk management tool, insurance safeguards our most valuable possessions, including our lives, health, homes, and companies. The need for insurance may differ from person to person, but some insurance products are essential for everyone to have in order to ensure a safe future.
Must-have insurance products
Knowing the importance of insurance is the need of the hour. Following insurance products are the must-have for any individual today.
- Life insurance:
Life insurance is a must for everyone with dependents since nobody wants to leave their loved ones in a financial bind. In the case of life insurance, the nominee of the insured will receive payment of the sum assured or coverage amount in the event of the insured’s passing. A vital essential for ensuring your loved ones’ financial security even after your passing is life insurance. The chosen coverage amount should be able to offer whole financial protection, including the ability to replace lost income, pay off debt, and build a financial cushion that the insured’s family can use for long-term security. Despite the variety of life insurance policies available, it’s crucial to first obtain the term insurance with adequate coverage.
- Health insurance:
There are always health risks in life. It’s crucial to have the financial cushion to safeguard oneself against health contingencies, especially in light of the rising expense of healthcare and the prevalence of diseases. There are many different kinds of health insurance policies, including senior citizen health insurance, critical illness insurance, family floater insurance, and individual health insurance. It’s critical to have sufficient health insurance to safeguard you from financial hardship during medical emergencies.
- Motor insurance:
According to the Motor Vehicle Act, all vehicle owners in India are required to have motor insurance policy. To protect oneself against potential claims made by third parties following an accident, third party liability motor insurance is required for all vehicles, whether they are two-wheelers, automobiles, or commercial trucks. However, vehicle insurance policies come in a comprehensive package that includes personal accidental coverage for you as the owner in addition to protection for your valued assets (such as a bike or car) against numerous risks of damage or loss. Having a thorough vehicle insurance policy is crucial given the rising number of traffic accidents and the asset worth.
- Accident and disability insurance:
Accidents happen without warning and are unavoidable. Accidental disability can occasionally have a significant negative impact on your ability to earn money. It’s crucial to obtain accident insurance if you want to provide for your family and yourself financially.
- Home insurance:
One of your most valuable possessions is your house, which also contains a number of priceless items and memories. Despite your best efforts to secure it, your property is nevertheless subject to hazards such as theft and damage from natural disasters that you might not be able to totally eliminate. Therefore, getting home insurance is the best way to guard your house from losses and damages that could result from a variety of uninsurable occurrences.
Even though you should have insurance coverage to be ready for unforeseen events, you might not require all types of insurance. Any insurance product’s priority may change depending on your particular needs. The insurance sector is sizable, and it offers a wide range of product options to meet different needs. Some of those already listed should be everyone’s primary priorities. Your particular need or circumstance may strictly determine the priority of other types of insurance. Let’s look at a few of the insurance categories that are less important.
- Standalone critical illness insurance:
Every person may not require a critical illness insurance plan, especially if there is no family history of a critical disease. Critical illness coverage is occasionally included in health insurance policies and is also offered as a rider with life insurance policies. As a result, a critical illness standalone policy is solely dependent on the needs of the individual.
- Travel insurance:
For frequent travellers, travel insurance may be of the utmost importance. But not everyone might require it. Depending on each person’s particular demands, varying levels of insurance may be required. For instance, travel insurance may not be required simply for you if you are taking a domestic vacation and have complete health coverage that covers you for any medical crises across the nation. More particular, if you can afford to lose your pre-paid travel fees, you might not make travel insurance a top priority. Sometimes your credit card’s travel perk includes travel insurance as well.
Likewise, there are many insurance types that are not suitable or required for every individual. It’s important to think about the benefits that you can reap before investing in an insurance plan.
How to decide on the type of insurance you need?
Before you buy any insurance, it’s important to understand the need for insurance. Here are certain things to keep in mind at the time of deciding what type of insurance you need.
- Purpose of cover
- Risks that you want to be covered against
- How long you might need the coverage
List of benefits and importance of insurance
Insurance is a risk management tool not only benefits the individual and businesses but also benefits the society and economy in numerous ways. Following are some of the important benefits of insurance:
- Provides peace of mind:
Insurance offers defense against a variety of risks that could bankrupt you or your family. Insurance gives one a sense of security by addressing the risks associated with corporate operations and personal lives. If you have life insurance, you may rest easy knowing that even without you, your family’s finances will be secure. You can feel more secure knowing that you won’t have to spend all of your savings in the event of a medical emergency if you have health insurance.
- Promotes risk control:
As insurance works on risk transfer mechanism, it promotes risk control activity.
- Promotes economic growth:
The nation’s general economic growth is aided by the investment of insurance funds in diverse projects including the provision of water, electricity, and roads, among other things. Additionally, insurance gives people work opportunities. In addition to paying taxes on profits produced and participating in the stock market, insurance also supports economic growth by attracting foreign direct investment.
- Distribution of risk:
Risk of insurance is spread across various individuals and organization instead of concentrating on only one.
- Helps to get loan easily:
There are loan facilities offered against insurance policies. In case of home loans, having an insurance cover can help to get the loan easily from the lender.
- Inculcates savings habit:
Numerous life insurance policies offer the benefit of investment combined with protection. These goods help people develop a regular saving habit. Long-term financial objectives can be achieved with the help of programmers like endowment insurance policies. Pension plans make it possible to obtain a steady income as you age.
- Provides tax benefit:
Depending on the type of insurance product, the insured receives tax benefits for the premiums paid. For instance, Section 80C of the Income Tax Act allows for tax deductions on life insurance premium payments. Additionally, Section 80D of the Income Tax Act permits a tax deduction for the premiums paid for health insurance policies.
Following are some of the examples that demonstrate the importance of insurance:
- Case 1:
Ram, a Bangalore-based software developer, suffers an accident and passes almost immediately, leaving his wife and kid inconsolable with grief. He was only 40 years old. He is currently repaying a 30 lakh rupee home loan. Fortunately, Ram purchased INR 1 crore in term insurance at the age of 32 for the whole 25-year policy term. Within ten days, his wife got reimbursement from the insurance company, allowing her to pay off the loan and put the money toward investing for future needs. His family would be in serious financial trouble right now if he had not made the correct choice to buy life insurance! Your family’s future security depends on insurance.
- Case 2:
A high fever caused Sunil, a worker at a multinational corporation in Mumbai, to suddenly lose consciousness. He was then taken right away to the hospital. For a diagnosis and treatment, he was hospitalized for three days. His medical bills were almost INR 70,000 when he was released from the hospital after three days. Fortunately, he had signed up for a Rs. 3,000,000 health insurance policy. Bills were paid directly to the hospital because it was included in his insurer’s network of hospitals. He would have had to pay INR.70,000 out of pocket if he had not realized the value of insurance. When unplanned occurrences occur, insurance enables you to maintain your financial stability.
To conclude, shield your life and important assets against all the uncertainties with the help of insurance. Know what insurance coverages you need, compare and invest wisely. It’s important to understand that the need for insurance is to secure what you love.