With this article we take a look at how insurance works and what are the benefits it offers that makes insurance essential.
Life is full of uncertainties. Wouldn’t it be nice if there was a way where we could at least deal with these uncertainties if not stop them from occurring?
Insurance is one of the oldest businesses in civilization as it deals with the perpetual problem of uncertainties of life. It is an instrument that mitigates the risk of loss of life, health, assets, property, etc. It helps a person recover from any adversity through financial and monetary compensation. While everyone has a general idea of what insurance is, in this article we shall take a look at all aspects of the insurance business in detail.
What is Insurance?
Insurance is a financial product which is a legal agreement between the insured (person insured) and the insurer (insurance company) whereby the insurer promises to cover the losses incurred by the insured due to unforeseen circumstances by compensating them with financial resources. The insured person promises to pay a certain recurring amount called a ‘premium’ to the insurance company in return for this promise.
Gaining insurance cover is not only limited to individuals. Even companies can seek insurance cover. Assessing the insurability of a person is a very important part of the insurance mechanism. For instance if a person has a pre-existing health complication prior to getting insurance. The insurance company will then assess how morbid is the health complication before deciding to cover the person through its insurance policy. The insurance company evaluates the insurance cover based on its various parameters laid down for the same.
What are the Various Types of Insurance?
In India, there are broadly two types of Insurance:
- Life Insurance
- General Insurance
Let us take a look at both in detail.
Life Insurance:
This is one of the most popular insurances as it covers the life of an individual. The insured individual pays a particular premium to secure his/her life by the insurer in case of untimely death. In return, the insurance company will pay a fixed amount of insurance at the time of death or at the time of maturity, whichever is earlier.
A Life Insurance cover serves two purposes:
- It provides financial security to the family of the insured in case of his/her untimely death in terms of the insurance money paid by the insurance company.
- It also acts as an investment tool wherein a certain amount of money (basis the terms of the insurance policy) gets accumulated and is paid back to the insured if he is still alive at the time of maturity of the policy.
Also, as an investment, the annual premium paid is deductible from taxable income under section 80c of the Indian Income Tax Act.
Life insurance, thus, is a useful and essential type of insurance that every individual should seek for themselves. There are various types of life insurance policies, such as Term Insurance, Whole Life Insurance, Endowment Policy, Money-back Policy, Pension Plans, and Unit-Linked Insurance Plans (ULIPs).
General Insurance:
General insurance covers the financial loss that might occur due to damage to your house, car/motor, and health, to name a few important ones.
Health Insurance: Another essential type of insurance is Health Insurance. With a rising number of diseases, there is also an increase in treatment costs. This is where a Health cover becomes essential as it usually covers costs for treatment, hospitalization, and medication.
Health insurance also can be bought for either covering generic diseases or even for specific ailments and conditions.
Car/Motor Insurance: This type of insurance covers cars, two-wheelers, etc. against damages arising out of accidents, thefts, natural or human-made calamities, and even covers third party liabilities.
House Insurance: House insurance provides for losses incurred due to damage caused by natural calamities, like fire, earthquakes, etc. It also covers the belongings inside for damages arising out of burglary.
Other types of General Insurances include Travel Insurance, Education Insurance, Fire Insurance, etc.
Benefits and importance of having insurance
Let us now understand the importance of Insurance.
Financial Security
The foremost importance of having an Insurance cover is financial security. It provides not only to the insured from the losses incurred but also provides financial security to the family members of the insured in case of any emergency.
It also provides financial support to businesses in case of financial loss due to fire, theft, or other mishaps. Similarly, a Health Insurance takes care of the hospitalization and treatment costs, thus easing the burden of increased medical costs.
Spreading of Risk
Taking an Insurance cover means transferring the risk of loss from the insured to the insurer. Hence, in simple words, in case of an unforeseen occurrence, the insurance company bears the loss by paying to the insured from the funds collected using premium collected from millions of policyholders.
Economic Growth and generating long-term financial resources
Insurance policies are long term policies and so the premium paid by the policyholders over this long period is pumped in by the insurance sector to build infrastructure assets such as roads, dams, etc.
Benefits of Insurance
- As discussed, Insurance provides financial security against risk and uncertainty.
- Tax benefits to the insured under section 80C of the Income Tax Act and section 80D in case of medical insurance.
- Encourages regular savings to pay the insurance premium regularly.
- Insurance policy can be mortgaged to raise a loan.
- Policies like the ones that cover life and provide pension are a great way to provide financial assistance to people in their old age.
Conclusion
While insurance is a generally common term, the fine print of policies can get technical and tedious to understand in its entirety. Besides, understanding the financial benefits and returns on investment is something that not many people are familiar with. Different policies are better suited for different people during different circumstances. So it is always better to seek advice from a financial expert and understand all aspects of a policy before investing in one. If you have any other queries with regards to Insurance or other financial matters, get in touch with us and our team of experts will be happy to assist you with your requirements.
