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You have probably heard people saying, “Get insured!“
They mean it for life, health, cars, and businesses. You might wonder, “Why should I consider these, especially when I’m young and healthy?”
Well, here’s the thing, everyone needs insurance. It’s like a safety blanket for you, your finances, and your family when things get tough, even if you’re feeling great right now.
In this blog, we will discuss all about insurance. We’ll explain what it is, discuss the most important types, and why it’s a big deal. Insurance isn’t just paperwork, it’s super helpful, like a superpower against money troubles when unexpected stuff happens. Hence, emotional and psychological loss can’t be compensated, but when it comes to money, insurance can help you recover from financial setbacks.
So, when life throws curveballs your way, insurance is like having a financial teammate to help you catch them. It’s all about keeping your present safe and securing your future, so you and your loved ones can relax, no matter what life brings.
What is Insurance?
Insurance is a legal agreement between the insurer (insurance company) and the insured (that is you), also known as insurance coverage or a policy.
It’s like a deal where you get protection, which the insurance company provides. You pay a regular amount, known as the ‘premium,’ to the insurance company. In return, they promise to support you financially if unexpected events like accidents or health issues happen.
However, there are rules; they will only cover what’s agreed upon in advance, and the amount they give you depends on your premium payments. Essentially, insurance acts as a safety plan; while investing a little now, you shield yourself from potential financial crises in the future.
In today’s world, Insurance extends beyond cars and health, and you can even safeguard belongings like art or pets. It’s about prioritizing what’s dear to you and ensuring it stays protected.
Benefits of Insurance
The benefits of insurance coverage are many and varied, depending on your insurance type. However, some common benefits include:
- Financial Protection: Insurance can help you pay for unexpected expenses, like medical bills, car repairs, or home repairs, without having to go into debt.
- Peace of Mind: Insurance can give you peace of mind, knowing that you are financially protected in case of an unexpected event.
- Access to Quality Healthcare: Health insurance can give you access to quality healthcare at a discounted price.
- Liability Protection: Liability insurance can protect you from financial losses if you are sued for causing harm to someone else or their property.
- Asset Protection: Insurance can protect your assets, such as your home, car, and belongings, from financial losses in the event of a covered event.
- Tax Benefit: When you have insurance, you might also get some tax benefits, depending on the type of insurance you have. For example, if you pay premiums for life insurance, you can get a tax deduction under Section 80C of the Income Tax Act. And if you're paying premiums for health insurance, you can qualify for tax deduction under Section 80D of the Income Tax Act.
- Loan Facility: Insurance policies can sometimes be used to secure loans. For example, when you are applying for a home loan, having insurance coverage can make it easier to get approved by the lender.
- Wealth creation: When you have a full life insurance plan, there's something called a "maturity benefit." This is a chunk of money you get when your insurance plan ends. You get all this money at once and can use it for various financial needs, and it can serve as a retirement fund, help you purchase a home, fund an overseas vacation, or support your hobbies and interests.
Insurance Policy Components
The essential elements of any type of insurance include the premium, policy limit, and deductible.
- Premium: Premium is the amount that the policyholder pays to the insurance company in exchange for coverage. You can pay premiums every month, every three months, every six months, or once a year.
- Policy Limits: The maximum amount that the insurance company will pay to cover the loss under a specific insurance policy.
- Deductible: The deductible is the amount of money that the policyholder must pay out of pocket before the insurance company pays a claim.
Example: With a ₹50,000 deductible, if you incur ₹1,00,000 in damages, you pay ₹50,000, and the insurer covers the remaining ₹50,000.
Exclusions: Exclusions are events or circumstances that are not covered by the insurance policy. For example, most homeowner’s insurance policies exclude floods and earthquakes.
Types of Insurance
Let’s explain the different types of insurance policies available.
1. Life Insurance
Life insurance is a financial agreement between you and an insurance company. If you pass away during that period, the insurer pays a sum of money to the insured’s nominee, like your spouse or children. It is called the death benefit, and to have this coverage, you pay a fee, known as the premium, either as a one-time payment or in installments.
As long as you keep paying the premium, you are insured. Life insurance is important, especially if you have dependents, as it provides financial security for your family even if you’re not there.
Life insurance comes in various types but mainly falls into two categories.
- Term Insurance: It is a type of life insurance that is the most affordable life insurance that provides coverage for a specific period of time, such as 10 to 20 years. If you pass away during the term, your loved one gets a payout. For Example, a 30-year-old man purchases a 20-year term insurance policy with a death benefit of ₹1 Cr., and pays a monthly premium of ₹1,000. If he dies during the 20-year term of the policy, his beneficiary will receive a death benefit of ₹1 Cr. If he outlives the 20-year term of the policy, the policy will expire, and he will no longer be covered.
- Endowment Life Insurance: Endowment life insurance brings together the security of life coverage and the advantages of saving for the future. It not only provides financial protection but also ensures a lump sum amount is paid out either when the policy matures or if you die during the term.
This policy is designed for the long run, spanning between 10 to 25 years. You pay a premium on a regular basis, and at the end of the policy’s term, you receive the maturity benefit, which includes the total of the premiums paid along with the returns on the investments.
If you pass away during the policy’s term, your loved ones will receive the death benefit in the sum of paid premiums plus a guaranteed amount.
- Whole Life Insurance: A whole life insurance policy is permanent life insurance that remains in effect for the entire life of the insured person as long as they keep paying the premiums. When you buy this policy, you choose the coverage amount, which will be given to your nominee when you pass away.
Typically, these policies mature at the age of 100. If the insured person passes away before that, the nominee receives the coverage amount. But if they live past 100, the insurance company pays the matured policy coverage to the policyholder. It’s a lifelong protection plan that ensures your loved ones are taken care of.
As mentioned above, endowment plans typically offer coverage for a set length of time, typically up to the age of 60 or 65.
- Children's Insurance: Child insurance plans have the primary purpose of providing financial support for your child's future and to safeguard their savings even in unfortunate circumstances. Child insurance is the same as other policies, where you buy a policy and make regular investments in it over a certain period. If, during this time, the policyholder passes away, the insurer pays out a benefit to the beneficiary.
- ULIPs: ULIP stands for Unit Linked Insurance Plan, which offers two key benefits: it helps you invest for your long-term goals and provides life insurance coverage to financially protect your family in case of unfortunate events.
When you pay a premium for a ULIP, the money will divided into two parts. A portion of it goes toward your life insurance coverage, and the rest will invested in equity, debt, or a combination of both funds, depending on your risk tolerance and financial goals. This flexibility makes ULIPs a great choice for achieving your and your family’s long-term financial objectives.
ULIPs have evolved significantly since their introduction in 1971 by the Unit Trust of India (UTI) and later by the Life Insurance Corporation (LIC) in 1989.
2. General Insurance
Non-life insurance policies, also known as general insurance policies, encompass various types of coverage such as home, vehicle, education, and more. These policies provide financial protection for various assets and situations, ensuring you’re covered in case of unexpected events.
In India, general insurance is categorized into four distinct types.
- Health Insurance: Health uncertainties are a part of life, and with increasing healthcare costs, having financial protection is important. There are various types of health insurance, such as individual, family, critical illness, and senior citizen policies. It's important to have adequate coverage to avoid financial strain during medical emergencies. You can get insurance for yourself and your family, including your spouse, parents, siblings, and children.
Some insurers offer cashless services in partner hospitals. Otherwise, you can request reimbursement for hospitalization and treatments related to covered illnesses, and the associated costs will be covered by your policy.
- Home Insurance: Your home is precious, holding memories and valuable possessions. Despite precautions, it's at risk from things like theft or natural disasters. It is your safeguard, protecting against potential losses and giving you peace of mind. Although it doesn't protect your home from floods or earthquakes, to be safe from these events, you will need to get additional insurance specifically for them.
- Vehicle Insurance: It is a must for vehicle owners in India as per the law, whether you have a bike, car, or commercial vehicle, you need third-party coverage to safeguard against claims from others in an accident. These policies also offer comprehensive protection for your valuable assets and provide personal accident coverage. With the rise in accidents, having this insurance is important. It will not only protects your vehicle but also ensure you follow traffic rules by carrying your insurance papers while driving.
- Travel: Travel insurance is important for frequent travelers, but not everyone needs it, mainly it depends on your type of trip. For example: If you travel within your own country and have good health insurance, you might not need extra travel coverage. Sometimes, it's even included with your credit card. Similarly, you might skip additional coverage plans if you can handle losing some prepaid trip expenses. But if you travel a lot, especially internationally, travel insurance can be a lifesaver for things like lost baggage or trip cancellations.
Things to Remember Before Buying an Insurance Plan
If you are planning to buy insurance, start by checking how much coverage it offers. Before you decide on a specific policy, figure out how much coverage you need. Compare what different companies offer and see which one suits you best based on what they provide and their terms and conditions.
Another important thing to consider is whether the insurance company has enough money to pay for claims if something goes wrong during your policy period. If they don’t have enough money, they might struggle to pay claims that come up after your policy ends. So, it’s a good idea to make sure the company you choose has enough money saved up before you sign up for their insurance. This could impact your decision, especially if other companies are offering similar coverage for less money.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
