Understanding of Insurance
Meaning: Insurance is a contract, represented by a policy in which individual or entity takes financial protection from insurance companies in exchange for insurance premium to prevent any unexpected losses or accident. It is a risk-transfer mechanism that ensures full or partial reimbursement for the damage so it is a very important financial product as you would know life is very uncertain and no one can expect what will happen in the next second, minute or day.
How they works and why it is so important to have an insurance policy.
In the insurance industry, A relationship between the two parties starts when an individual or entity purchases a financial protection plan from the company. The contract of insurance is based on the principle of “Utmost good faith”. The insurer (selling company) and the insured (buyer) obtain a legal contract for insurance, which is called an insurance policy. The policy document has details about the terms & conditions under which the insurance company will pay the amount to the insured person or the nominees. The insurance company takes a certain amount of money as a consideration which is called “Premium”. Thus by taking premium from a person it provides security to the person or persons which are insured. The insurance company collects the premium on a monthly, quarterly, half-yearly or annual basis, depending on the type of policy one is taking, and also the Sum insured opted. Often an ordinary family relies on the income of bread earner for their continuously day to day needs but family face a lots of financial difficulties after the sudden demise of sole earner. Nobody knows when the person will die. This uncertainty is the risk that creates the need for some kind of protection to compensate for the economic loss from the person’s death. Hence having a financial safety cover from the insured eliminates the risk of uncertainty or risk that can occur in the future.
Types of insurance
Insurance is broadly described in 2 types:
- Life Insurance
- General Insurance
Life Insurance: – You never know when death and disease will come but you can take proper steps to reduce this risk and for this the first thing you would do to secure yourself and your family by investing in life insurance. So people prefer to buy a policy and pay the premium as long as they live, to ensure that their family or nominee will get the sum assured after their death. Under the policy, the insured (policyholder) pays a certain amount of money (which is called premium) to the insurance company according to the time period that they choose (monthly, quarterly or annually). In return, the insurer guarantees to pay predetermined money in 2 ways.
- In the case of survival, if the insured survives until the end of the plan period, then the insurance company pays the maturity amount to the policyholder.
- In the event of death, the insurance company pays the sum assured to the nominee appointed by the insurer, which helps the family of the holder to live their life without depending on others.
The life insurance is the type of insurance that covers a life from the uncertainty of death. It basically covers the human life value. The death can occur due to Medical illness, Accident or Natural death and all these things are very common in today’s world due to which the uninsured people suffer a lot. Whereas an insured person’s family will obviously have the sorrow of his/her death but can make their living by using the amount received through the life insurance policy and they don’t have to worry about financial problems which is one of many problems occurring after the death of the bread earner.
General Insurance: – General insurance or Non-Life insurance covers the risk associated with non-life components or assets. It has different types of insurance such as health insurance, Fire Insurance, Vehicle Insurance, Home Insurance, Marine Insurance, etc. The general insurance covers the risk occurring to the assets like machinery from the risk of breakdown of the machine due to natural calamities or human error, home from the risk of natural calamities like Storm, Earthquake, Tsunami, etc. and Vehicle in case of accidents.
There is also another type of insurance introduced nowadays as Personal Accident policy which covers the insured person in case of death due to accident or being partially or fully disabled due to accident. The insurance company provides the whole sum insured to the nominee in any of the above cases.
Types of general insurance are as follows:
- Health Insurance:– The health plan or usually known as mediclaim is also an important thing today because people are getting ill and catching diseases at a very high rate due to lack of quality lifestyle and on the other side the whooping hospital bills put them into even more depression. So here health insurance comes to the rescue which pays off the hospitalization bills and also the medicinal and pathology bills which form a huge part of the total bill. So if you have a Health insurance policy, you don’t need to worry about the bills and just take care of your loved one. The insurance company provides a cashless facility if admitted to their network hospital and reimbursement facility if admitted to a non-network hospital.
- Vehicle insurance: It is used to buy insurance for all types of vehicles including cars, bikes, transport vehicles and it is compulsory by the law. The main reason is it covers the risk if a vehicle is damaged in an accident or stolen then the company will reimburse the loss.
Advantages of buying an insurance policy
The first and main advantage is that it provides protection to the asset or human life.
You can avail of tax benefits by paying the premium of the insurance policy. At the time of filing ITR you can get deduction under 80D for Health insurance policy and under 80C for Life Insurance policy.
You can also use the insurance policy as collateral security for a housing loan.
You can also invest in different funds through different life insurance policies which are expertly managed by professionals.
It ensures that your hard-earned money does not gets spend in the hospitalization expenses or repairs of machinery, thus you can save that money and invest it to gain better returns.
Thus Insurance is a very important part of our life and still many people are uninsured in India. Even after being the second largest populated country only 24% of people are insured to date. Have you bought an insurance policy? If not, buy it today!!