In our lives, we all have heard of the term ‘insurance’ in one context or the other. While you go out to buy your dream bike, you get to know about two-wheeler insurance. When it is about protecting your loved ones from financial hardships, you hear about life insurance. Similarly, to keep the finances in check in case of a medical emergency, there is health insurance.
Have you ever wondered what ‘insurance’ means? You can think of it as a way to transfer the risks of disability, destruction, or death to life and assets to an insurer. It is important for you to understand the concept of insurance before you buy any of its types for various needs.
Let’s start with the basic definition.
What is Insurance?
Insurance refers to the legal agreement held between you (the insured individual) and the insurance company. Based on this agreement, the insurer promises to pay you a certain amount in case of the occurrence of insured contingency that causes a loss. The contingency can include the insured’s death or damage caused to the insured property.
You pay a certain insurance premium to the insurer to get the promised benefits for covered contingencies. Think of insurance as a contract that makes you eligible for financial protection against various types of covered losses.
Purchase of different types of insurance policies must be based on your needs and life goals, which can be different from that of your peers.
The concept of insurance is quite easy to understand – You pay a certain amount to the insurance company to offer protection to your health, life, or vehicles for a specific period. In return, the company pays for the incurred financial loss resulting from the insured events/contingencies.
How Does Insurance Work?
An insurance policy, as a contract, has complete details of circumstances or conditions for which the insurer will pay the amount (sum assured or sum insured) to either the insured individual or chosen nominee.
Generally, the premium of an insurance policy is much less than the benefits it offers. An insurer takes the risk of offering a high insurance cover at a low premium because not all insured individuals end up filing a claim.
You can seek an insurance policy from the insurer of your choice. However, the decision to approve your insurance application is in the hands of the insurer. The company evaluates the applications before making a decision.
What are the Primary Components related to an Insurance Policy?
All insurance policies have a few components that help an individual in understanding how to get maximum benefits. Mainly, there are three components related to every type of insurance that you should know about:
| Components | Definition |
| Insurance Policy Premium | The price payable in the selected payment mode (monthly, yearly, etc.) to buy a policy |
| Policy Limit | The maximum amount payable to the insured or nominee for a covered loss |
| Deductible | The out-of-pocket expense that an insured individual has to bear before the insurer settles the claim |
You May Also Like to Read: A Complete Guide to Claim Settlement Ratio
What are the Benefits of Insurance Purchase?
By buying the right type of insurance policies in life, you make yourself eligible for different types of benefits. These include:
1. Financial Coverage Against Uncertainties
It is one of the most sought-after benefits of buying any type of insurance policy. Whether you buy a policy for yourself or your assets, you will be indemnified against the covered losses.
2. A Way to Invest Money
Many insurance policies, like ULIP, provides a way to invest money into diverse financial instruments while also providing the basic insurance coverage. You can plan for such investments to fulfil your life goals.
3. Ease of Managing Capital Flow
The uncertainties related to paying for the losses incurred out of pocket can have a direct impact on an individual’s lifestyle. With an insurance policy, you can tackle such financial uncertainties easily.
4. Tax Benefits
Insurance purchase also makes you eligible to avail of tax deductions under different Sections of the Income Tax Act, depending on the type of policy you buy.
What are the Types of Insurance in India?
Life Insurance
A life insurance policy is meant to protect your family against financial uncertainties that may occur in case of your unfortunate demise. It forms a significant part of a sound investment plan for every earning individual.
Health Insurance
This type of insurance policy helps in getting the best quality treatment in case of medical emergencies or healthcare problems. Having a health insurance policy by your side means you need not worry about arranging money to get the required treatment to stay healthy.
Motor Insurance
Also known as vehicle insurance, motor insurance protects your vehicles, both two-wheeler vehicles, cars, and others, from unexpected events like road accidents or theft. It is further categorized into third-party and comprehensive insurance.
Read More: Types of Life Insurance Policies in India
Why is It Important to Buy Insurance?
Many people think of buying insurance as an unnecessary expenditure. It can be because we all feel good about our lives and worry less about the unexpected situations that may come up to cause financial stress. But there are many reasons why insurance purchase should be an integral part of your life.
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To Gain Financial Stability
Insurance policies help prevent financial worries that may arise from various unexpected events in life. Otherwise, certain situations can burn a hole in your pocket and jeopardize the financial future that you have planned for yourself.
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To Get Peace of Mind
Having a suitable insurance policy by your side becomes a source of peace for your mind. It is because you feel assured that if anything unexpected happens, the policy will cover the possible damage or loss, helping you sail through the challenging times easily.
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To Prevent Stress During Inevitable Situations
Ahead of all the planning and acts we do to live a comfortable life, some unforeseen events often turn things upside down. Having an insurance policy with adequate coverage helps prevent stress, physical, emotional, and financial, so that you can think about ways to recover from the eventualities.
FAQs
1. What determines insurance premium?
The premium of insurance policy is calculated on the basis of several factors, including the type of selected policy, policy period, premium payment period, benefits, included riders if any, and many others.
2. Why do I need to renew my insurance policy?
The insurance coverage you get under a policy is continued only when it is in force. Depending on the tenure for which a single premium is paid, insurance renewal becomes mandatory. You should also know that the insurance policies lapse if you do not pay the premiums timely.
3. How can I file a claim under my insurance policy?
The process of filing insurance claims differs from one policy type to another. Also, there can be some differences in the claim process defined by various insurance companies. Hence, it is advisable to check for the claim settlement process at the time of buying any insurance policy.
4. What is waiting period in my insurance policy?
Waiting period is the time frame for which you, as an insurance policyholder, must wait before its coverage comes into effect. It also means you will not get any insurance benefit on filing a claim during this period.
5. How many insurance claims can I file in a year?
You can only file claims for a specific number of times in a year as defined under your insurance policy and its type.
