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What is Insurance?

Insurance refers to the assurance against risks and losses or covers against unforeseen eventualities. With these plans, if the policyholder suffers an unexpected loss on the insured object or person, the insurer will pay the benefit amount as compensation for the incurred loss/damage. You can buy a suitable plan and get the required coverage in exchange for premiums paid on a regular basis. Let us learn more about ‘what is insurance’ and how it works below. 

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What is Insurance Policy?

Insurance 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. With insurance, 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. 

How Insurance Works?

Let us understand ‘what is 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.

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What are Insurance Components?

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

Premiums Payable: This is the amount the policyholder has to pay for the applicable premium payment term to get the desired life cover for the required policy term. The premium payments can be made on a monthly, quarterly, annual, or half-yearly basis for a limited or regular premium payment term.

Policy Limit: In insurance, policy limit refers to the maximum amount of money the nominee or the policyholder is eligible to receive in case of an eventuality. The maximum limit for the amount depends on the premiums paid, the policy term, the severity of the eventuality, and other such factors.

Deductible: A deductible is the maximum sum of money the policyholder may have to pay before his/her claim gets settled. This is usually applicable in health and general insurance policies.

Insurance is divided into the following two main categories:

Life Insurance General Insurance
Term Insurance Plan Health Insurance Plan
Term Return of Premium Plan Motor Insurance 
100% Refund of Premium Plan at No Cost Car Insurance Plan
Whole Life Insurance Policy Home Insurance
Savings Plan Travel Insurance 
Child Insurance Plan Business Insurance
Endowment Plan Fire and Burglary Insurance
Money Back Plan Marine Insurance
Unit Linked Plans Cyber Insurance
Pension Plans Group Insurance

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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:

Individual Insurance Plans Group Insurance Plans
These plans can be customised to each individual’s needs These plans cannot be customised as per the needs of every individual covered under the plan
These plans only cover one individual against the risks covered under the plan These plans protect each member of a group or company against the covered risks
The premiums are personalised on the basis of a person’s age, health, medical history, and other such factors The premiums for these plans are generic and the same for every person covered under the plan
The premiums have to be paid on a regular basis as per the chosen mode of premium payment The premiums are auto-deducted from the salary every month

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.

  • 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.

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 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 term plan online 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.

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 exempted 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.

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