What is Insurance?

What is Insurance Policy?

To explain what is insurance, it is a legal contract that the policyholder signs to receive the requested life cover in exchange for the required premiums for the mentioned policy term. The insurance document has all the details regarding the coverage, inclusions, and exclusions within the policy. It also clearly states the conditions under which the nominee is eligible to receive the benefit amount from the insurer during the policy term.

Insurance is a transfer of risk from the policyholder to the insurer. The main feature of insurance meaning is that the insurer promises to pay the benefit amount in case of an eventuality and help the policyholder or the nominee recover any of the losses incurred due to the said eventuality.

To claim the benefit amount, the nominee has to fill in the company’s claim form, attach the required documents, and submit them as soon as possible to get a quicker and hassle-free claim settlement. 

Why is Insurance Important?

Insurance helps to financially protect you, your dependents, and your assets from emergencies, unexpected expenses, and losses. By paying regular premiums, you transfer potential financial risks to an insurance company. An insurance policy can help cover costs related to medical care, property damage from natural disasters, or unexpected expenses like veterinary care for your pets.

The main purpose of insurance is to provide security, stability, and support when you need it most. With the right types of insurance, such as health, life, or property coverage, you can live with fewer worries, knowing that you have a financial safety net in place. For many people, online insurance options also make it easier to compare policies and choose coverage that fits their needs.

How Insurance Works?

Now that we have understood insurance meaning, let us understand how insurance works in India:

• Contractual Agreement: An insurance policy is a formal and legally binding contract between the policyholder, who buys the insurance, and the insurance company. This contract sets out the terms and conditions of the coverage.

• Premium Payments: The policyholder makes regular payments, called premiums, to the insurance company in order to keep the policy active.

• Risk Transfer: In return for these premium payments, the insurance company takes on the financial risk of specific events or situations that could cause loss or damage to the policyholder

• Compensation for Claims: If the insured event, also known as a contingency, takes place, the insurance company provides financial compensation. This payment, called the sum insured or sum assured, helps the policyholder cover their losses or damages.

Explain How Insurance Works with an Example

Let us understand ‘what is insurance’ and the features of insurance with the help of an example,  

Suppose Sameer bought a 1 crore term insurance for himself and nominated his wife as the nominee. The policy was for 15 years, and he suffered an unforeseen death during the policy term. In this case, the company will pay the 1 crore sum assured to the nominee of the policy and the policy will end. Sameer’s wife can use the payout amount to take care of their financial obligations, pay out any of the remaining loans, and maintain her current quality of life.

Note: Know what is term plan and the features of term insurance before buying a term plan for your loved ones.

Note: It is suggested to calculate the term plan premium on the term policy calculator online insurance tool by Policybazaar before buying.

What are Insurance Components?

To help you understand ‘what is insurance,’ here is a list of the insurance components:

Premium: This is the regular payment you make to your insurance company to keep your policy active. Premium amounts depend on factors like your age, health, coverage amount, and type of insurance.

Policy Cover: Your insurance policy cover outlines all the details of your plan, including coverage amount, terms and conditions, exclusions, and limitations. It serves as the official record of your insurance agreement.

Policy Term: The policy term is the duration for which your insurance is valid. For instance, a term life insurance policy lasts for a fixed number of years, while a whole life policy remains active until the insured’s death.

Policy Limit: This refers to the maximum amount an insurance company will pay during the policy term. Knowing the policy limit ensures you select coverage that meets your financial needs.

Premium Payment Term: Some policies require premium payments for the entire policy term, while others may have shorter payment durations. Certain plans even ask for premiums throughout your lifetime.

Sum Assured: The sum assured is the amount your beneficiaries receive in the event of a covered incident. This is a guaranteed benefit chosen when purchasing your insurance policy.

Maturity Benefit: Some life insurance policies provide a maturity benefit, which is paid to the policyholder upon completing the policy term. This benefit often reflects the savings or investment component of the plan, in addition to the sum assured.

Insurance is divided into the following two main categories:

What are the Types of Insurance Policies?

Apart from the above-mentioned plans, the main 3 types of insurance policies are as follows:

1. Life Insurance

   Life insurance plans financially secure the policyholder’s family during the policy term. During this term, if the policyholder suffers an unfortunate death or meets with an eventuality covered under the plan, the insurer will pay the applicable death or rider benefit amount to the nominee of the policy as per the policy’s T&Cs. These plans are best suited for the breadwinner of the family as the payout from these plans can act as income replacement for the family members in the absence of the main income earner.

2. Health Insurance

   Health insurance provides the policyholder with financial benefits in case of a health emergency to help the policyholder pay for the hospital bills and cover the costs of expensive treatments. There are basically two types of health insurance plans: mediclaim and critical illness insurance.

3. Non-Life Insurance

   Non-life insurance plans consist of insurance plans covering the risk to cars, bikes, homes, pets, businesses, and more. With these plans, in case of a loss incurred by the policyholder due to the harm of any of the insured items/objects, the company will payout the benefit amount as compensation.

The other two types of insurance are individual plans and group plans:

What are the Benefits of Insurance?

Now that we have understood ‘what is insurance,’ let us learn the benefits of buying insurance in India:

• Family’s Financial Security: With these plans, you can secure yourself and your loved ones against the eventualities of life and recover from the losses using the payout amount. In the case of life insurance, the family can use the benefit amount to take care of their financial needs and pay off any remaining loans and debts that might burden them in the policyholder’s absence.

• Risk Management: Insurance provides a structured way to manage potential financial risks and uncertainties. By transferring the burden of unexpected expenses to an insurance company, you can plan your finances more effectively and reduce the impact of emergencies on your budget.

• Protection of Savings: Financial emergencies can arise at any time. With these plans, you can make sure you can take care of any eventuality with the payout benefit and not have to worry about depleting your savings.

• Build a Corpus: Certain types of life insurance plans, like ULIP plans, give the policyholders a chance to create wealth for their future goals and ensure their post-retirement lifestyle is secure in the absence of monthly income.

• Wealth Preservation: Life insurance plans like endowment plans and money-back plans are some of the best wealth preservation plans since they can protect your wealth from inflation and taxes for a long period of time.

• Income Replacement: Some plans, like the pension and retirement plans, can provide the policyholder with a regular income after the end of their monthly salary. These plans can help the policyholders maintain their lifestyle and fulfil any post-retirement dreams they might have.

• Peace of Mind: Knowing that you are financially protected against unforeseen events brings comfort and a sense of security. With the right insurance policy in place, you can focus on daily life and long-term goals without constantly worrying about what could go wrong.

Note: You should also check the term life insurance benefits if you are planning to purchase the term insurance plan.

What are the Features of Insurance in India?

Insurance plans offer various protections against risks, helping individuals and businesses manage potential losses. Here are some common insurance meanings and features of insurance in India:

1. Risk Coverage

   One of the main Insurance features is that it provides financial protection against specific risks such as death, illness, property damage, or accidents.

2. Premium Payment

   Policyholders pay premiums to keep their insurance active. The premium amount depends on factors like coverage, age, health, and risk level.

3. Sum Assured

   This is the guaranteed amount paid out by the insurance companies to beneficiaries upon the occurrence of the insured event (e.g., death in life insurance).

4. Policy Term

   One of the main features of insurance is that it is valid for a specified period. For example, term life insurance might cover 20 years, while health insurance is usually renewed annually.

5. Claim Settlement

   In case of a covered event, policyholders or beneficiaries file a claim to receive the payout. Timely and fair claim settlement is a crucial feature of insurance.

6. Tax Benefits

   Premiums paid for life and health insurance often qualify for tax deductions under sections 80C and 80D of the Income Tax Act.

7. Riders and Add-ons

   Additional coverage options, known as riders (e.g., critical illness, accidental death), can be added to enhance the features of insurance policies.

8. No-Claim Bonus (NCB)

   In health and motor insurance, policyholders can receive a discount on the renewal premium if they do not make any claims during the policy term.

9. Digitalization

   Many insurance companies provide online insurance services for purchasing, paying premiums, and filing claims, making the features of insurance more accessible and convenient.

What are Some of the Must Have Insurance Policies in India?

After understanding ‘what is insurance,’ let us see some of the must-have insurance policies and the features of insurance plans available in India:

• Term Insurance Plans: Term life insurance plans in India offer the policyholders pure risk protection throughout the policy term at highly affordable premiums for a large life cover. You can buy online insurance for term plans by comparing the available plans from the comfort of your home.

• Health Insurance Plans: A health insurance plan covers the hospital bills and treatment costs the policyholder might face on the diagnosis of life-threatening illnesses.

• Motor Insurance Plans: As per the rules of the Government of India, it is important for every individual to have motor insurance for their vehicles. With these plans, you can get comprehensive coverage against the risks of motor damage.

• Home Insurance Plans: These plans protect your house by providing financial help against unforeseen eventualities like burglary, theft, natural calamity damage, and more.

Note: Check out the best term life insurance in India and choose one that suits your requirements.

What are the Tax Benefits of Insurance?

Insurance plans not only provide the policyholders with financial protection and chances of wealth creation but also help them save on their yearly taxes.

• Section 80C: Under section 80C, you can claim a tax deduction of up to 1.5 Lacs on the total premiums paid for life and term policies in India.

• Section 80D: This section offers tax benefits on health riders like critical illness riders, hospicare riders, terminal illness riders, and more. The maximum tax deduction offered under this section is Rs. 25,000 for life assured under the age of 60 and Rs. 50,000 for life assured over the age of 60.

• Section 10(10D): The death benefits received by the nominee are completely exempt from taxes. But the maturity benefits received on policies with annual premiums of over 5 Lacs will be taxable.

**The tax benefits are subject to change as per the prevailing tax laws.

Important Insurance Terms You Need to Know

Understanding key insurance terminology is essential for making informed decisions about your coverage. Here are some important terms:

• Insurer: The insurance company providing the coverage.

• Policyholder: The person named on the policy.

• Policy Limit: The maximum amount an insurance provider will pay for a covered event.

• Deductible: The out-of-pocket amount you pay before the insurance coverage begins.

• Coinsurance: A percentage of costs you share with the insurer after meeting your deductible.

• Copay: A flat fee paid each time you use your insurance.

• Claim: A formal request for the insurance company to cover payments for a covered loss.

For more detailed explanations and additional insurance terms, you can explore comprehensive insurance dictionaries or resources offered by major insurance companies in India and globally.

How to Choose an Insurance Policy in India?

Choosing the right insurance plan is an important step in protecting yourself, your family, and your assets. Here’s how to approach it:

• Assess Your Needs: Start by identifying the types of insurance you require, such as health, life, property, or auto coverage. Consider factors like your health, age, dependents, property value, and financial goals.

• Determine Coverage Level: Decide how much protection you need. Look at insurance policy limits, deductibles, and premiums to ensure your plan matches your requirements.

• Compare Providers: Research different insurance companies and their plan options. Compare costs, coverage limits, and any extra benefits included in the policy.

• Seek Professional Guidance: If needed, consult an insurance agent or professional to help you understand your options and choose the best plan.

• Employer-Sponsored Plans: If enrolling through your workplace, your HR department can provide details about available insurance policies and help with insurance renewal options.