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You have probably heard people say, “Get insured.” This advice applies to life, health, vehicles, homes, and even businesses. Still, many people, those who are young and health, wonder why insurance is necessary at all.
To understand this, it is important to first know the insurance meaning. Insurance is a financial arrangement that protects you from unexpected losses by sharing risk with an insurer. In this blog, we will explain insurance meaning, why insurance is important, and explore the types of insurance that individuals should consider.
What is Insurance?
Insurance definition: Insurance is a legal agreement between the insurer (insurance company) and the insured (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, 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.
Why is insurance important?
After Insurance meaning, here why you should consider insurance:
- Protection against uncertainty
Life is unpredictable, and unexpected events can create sudden financial pressure. Insurance acts as a financial cushion that helps you handle such uncertainties without disturbing your long-term financial plans. - Effective risk management
Insurance helps reduce the financial impact of risks such as accidents, medical emergencies, property damage, or loss of life. By transferring these risks to an insurer, you can face difficult situations with greater financial stability. - Financial security for your family
Insurance ensures that your family remains financially protected even in your absence. It helps them manage daily expenses, meet long-term goals, and avoid financial hardship during emotionally challenging times. - Tax-saving benefits
Many insurance policies offer tax benefits under the Income Tax Act, 1961. This allows you to reduce your tax liability while building a secure financial safety net. - Savings and investment support
Certain life insurance plans combine protection with savings or investment options. These policies help you create wealth over time while ensuring financial protection for your dependents. - Peace of mind
With insurance in place, you can live with confidence knowing that financial support is available when needed. This sense of security reduces stress and allows you to focus on your personal and professional life.
How does insurance work?
When you choose an insurance policy, the insurer first evaluates your personal and financial situation. This assessment considers factors such as your age, lifestyle, health condition, profession, and the level of risk involved. Based on this evaluation and your family’s financial needs, the insurer determines the coverage amount, commonly known as the sum assured.
You pay a fixed amount called a premium at regular intervals to keep the policy active. In the event of an unforeseen incident covered under the policy, the insurer pays the sum assured to you or your nominee. This amount helps your family manage expenses and maintain financial stability during difficult times.
Regular and timely payment of premiums is essential, as the policy benefits are available only when the insurance cover remains in force.
Components of Insurance Policy
Now you have understood the insurance meaning, following are some components of Insurance:
- 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.
Benefits of Insurance
Here are some advantages of Insurance:
- 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.
Types of Insurance
Let’s explain the different types of insurance policies available, that will help you understand insurance meaning completely.
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.
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 since introduction in 1971 by 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, includes 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.
What are some common exclusions of insurance plans?
- Life insurance may not cover death caused by war, terrorism, intoxication, criminal activities, substance abuse, suicide, or participation in high-risk and life-threatening activities.
- Health insurance generally excludes self-inflicted injuries, pre-existing diseases during the waiting period, and illnesses arising from unprotected sexual contact.
- Car insurance usually does not cover accidents if the vehicle is driven under the influence of alcohol or drugs, or without a valid driving licence.
- Travel insurance may exclude coverage for travel to specific countries or regions due to political instability or safety concerns.
Final Words
Understanding insurance meaning is essential for making sound financial decisions. Insurance is not just a legal or formal requirement; it is a financial tool designed to protect you and your family from unexpected risks. It helps manage financial losses arising from health emergencies, accidents, property damage, or loss of life.
While insurance cannot prevent uncertainties, it ensures that their financial impact is controlled and manageable. By investing in the right insurance policy, you safeguard your present, protect your loved ones, and create a more secure financial future.
FAQS on What is Insurance
What is the most common type of insurance for salaried employees in India?
Life insurance is the most common insurance for salaried individuals, as it provides financial protection to dependents and is often linked with tax benefits and long-term financial planning.
Are insurance policies risk-free?
Insurance policies are generally low-risk if policy conditions are met. However, investment-linked plans like ULIPs carry market risk depending on the fund and asset allocation chosen.
How do I choose the right insurance policy?
Choose an insurance policy based on your financial needs, affordability, coverage benefits, flexibility, claim settlement record, and the insurer’s reputation to ensure long-term suitability.
What is the difference between life insurance and general insurance?
Life insurance covers the risk of death and provides financial support to dependents, while general insurance protects against losses related to health, vehicles, property, or travel.
What happens if I miss paying an insurance premium?
If you miss a premium, insurers offer a grace period. Failure to pay within this period may cause the policy to lapse, resulting in loss of coverage and benefits.
Is health insurance different from mediclaim?
Yes, health insurance offers broader coverage including hospitalisation, critical illness, and daycare treatments, while mediclaim usually covers only basic hospitalisation expenses.
What are the different types of life insurance policies?
Yes, you can hold multiple insurance policies. However, coverage should match your actual needs to avoid over-insurance and unnecessary premium expenses.
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.
