“Buying insurance cannot change your life, but it prevents your lifestyle from being changed.” – Jack Ma
We all have heard about it, but hardly pondered over it. On many occasion it is considered as an expense. But around 16 lakh families have been benefited with insurance claim settlement in 2022. Equal number of families have benefitted with medical and car insurance. It also plays a vital role in the economy. In this post you will get complete clarity on what is insurance, how it works, its types and benefits.
What is insurance
It is a legal contract between an insurance giving company known as insurer and an insured person popularly known as policy holder. The legal contract is called insurance policy. The insurer assures to provide financial coverage for any unfortunate loss, return the money with interest or reimburse as may be the case.
The policy is subject to certain terms and conditions. It is maintained by paying a premium as per agreed frequency.
How it works
Insurer collects details of a policyholder before the policy is issued. These details help the company to assess the risk involved and set a premium. Insurer pool together premium of large number of people who have similar risks and make sure that the few people suffer losses. This process is called underwriting.
Underwriting ensures
- How much they will agree to pay for a loss
- Under what circumstances they will make a payment
- How much the premium will be
Underwriters think about a number of different mitigants to avoid the risk. Accordingly, the price or premium varies. Each insurer has its own method and guidelines for underwriting. Therefore, one insurer may accept the risk while other may not.
Underwriting involves working out a premium that is low enough to attract a good number of buyers, and high enough so that there will be enough money in the pooled funds to pay all the claims that might arise, plus make a profit for the insurer’s shareholders.
Benefits of taking insurance
There are multiple benefit, some of them are given below:
- Risk management – It manage the risk of possible loss. One person alone cannot manage the risk of losing. When large number of people come together through the insurer, the probable loss is managed by the pool of funds created. Practically, all will not incur losses at a time. It may happen at different point of time. Thereby, the insurer can manage it.
- Protection – An insurance policy provide protection from probable loss. The loss incident can happen at any time. Therefore, insured is exposed to the risk. it helps to deal with that risk both monetarily and mentally.
- Certainty – By taking an insurance, the insured get certainty of compensation in the event of actual loss. It gives mental peace and satisfaction.
- Capital generation – the premium collected by insurer is deployed in capital market like shares, mutual funds, Govt. securities etc. The capital appreciation and profit generated is passed on to the insured at the end of the tenure if no eventuality happens.
- Savings & investment – Insurance policies help to inculcate saving and investment habits among individuals. Money saved through insurance premium comes handy when the insurance tenure ends.
- Regulated – its is regulated by IRDAI
Terms of insurance
Broadly we come across the following terms, though there are many more.
Premium – it is the periodic (monthly, quarterly, half yearly or yearly) pay out the insured make to the insurer to keep the contract valid. Premium depends on multiple factors like age, income, assets, location, health status, sex etc. of the insured. Further premium has three components Mortality charge, saving, sales and administrative cost.
Insurance policy – The contract between the insured and insurer.
Policyholder – The insured person is known as policyholder.
Coverage/maturity amount – the maximum amount which the insurer assures to pay in case any eventuality happens or at the end of the tenure of the policy.
Deductible – it is the amount the policyholder has to pay before the insurer pays a claim. It prevents policyholder from claiming small amounts on multiple occasions. Deductibles can apply per policy or claim, depending on the insurer and the type of policy.
Tenure – it the duration till which the policyholder will remain valid subject to payment of premium.
Different types
There are different types which are broadly divided into two groups – Life and non-life, also known as general insurance.
1. Life
It is related to coverage in case of death of the bread earner. The family or nominee get the protection of income or finance to overcome the tragedy. It can again be categoried into two – a) Whole life insurance or b) term insurance.
a) A whole life insurance provide coverage for a long period like 10 years, 15 years, 20 years and even till death. In case no event happened during the specified period, the policyholder is paid back a portion of the premium along with accumulated profit.
The unit linked insurance plan (ULIP) is a life insurance along with an opportunity to gain through investment in stock market.
b) A term insurance is year on year basis. It remains valid only when it is renewed at the end of the year. The coverage is high and no money is paid back at the end of the period. Therefore it is called pure insurance. However, now a day’s hybrid term insurance have been offered by different companies, where a portion of the premium is paid back. Term insurance may have a component of accidental losses as well.
2. Non-life/ General
It includes coverage for health, home, auto, education, etc. as mentioned below:
a) Health
It provides for protection against any financial losses arising due to health reasons for self as well as family members. On submitting the health policy, the respective hospitals don’t charge any fee. In other cases, you can claim reimbursement for hospitalization and treatments. However, it depends upon the policy and premium paid for coverage of the type of disease/illness/health issue and the extent cost is covered. It is similar to term insurance. The coverage continues subject to renewal at the end of each year.
b) Education
It is an education insurance cum investment scheme. The parent pay premiums till the child attain age 18 years or a age as decided by parent and insurer. At the end of the tenure the accumulated money along with profit is paid to the policyholder. This money is utilised for education cost of the child. In case of unfortunate death of parent, the assured money is paid to help the child fulfil his/her education dream.
c) Home/Property
It helps you to recover losses of household goods due to man-made or natural calamities theft, flood, earthquake, landslide, fire etc. The household goods includes all the belonging of the family like furniture, jewellery, white goods, clothes etc. The insured can also cover the house, in which case the premium will be high. This is also like term insurance, which need to be renewed every year to keep it active.
d) Motor/Auto/Vehicle
Insuring your vehicle is mandatory as Motor Vehicle Act of India. There are two types – third party and comprehensive. Third party vehicle insurance cover liability occurred due to losses of a third party. However, it does not cover losses occurred to the vehicle and its owner. The same covered under comprehensive policy. It may have a component of accidental loss as well.
e) Travel
It covers the losses that may arise during travelling such as luggage lost or damage, missed flight, injury etc.
Apart from the above, there could be various other types giving insurance cover against fire, marine, Tenant, Landlord’s, loan etc. These are customised insurance product designed by insurer as per suitability of the customer.
Conclusion
As could see from above insurance has multiple benefits. There are different types for different risk exposure. It also helps in saving money for future. Therefore it is highly recommended that you buy insurance for different needs and make it part of your financial planning.