What is Insurance? Types, Benefits and How It Works

Man and woman standing against a teal background with a question mark above the woman's head and an umbrella protecting them, symbolizing insurance coverage.

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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:

Insurance Policy Components

The essential elements of any type of insurance include the premium, policy limit, and deductible.

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.

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.

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.

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.

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.

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.

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