What is Insurance: An insurance policy is a legal agreement between two entities – the insurer and the insured, also known as insurance coverage or insurance policy. The insurer provides financial protection for the damages that may be suffered by the insured under certain conditions. A detailed explanation of insurance and its benefits and types is provided here.
What is Insurance
Insurance – Definition and Meaning
A financial protection policy is an arrangement in the form of a financial risk policy. The policy protects an individual from financial risk due to unpredictable circumstances.
The insured is the policyholder, while the insurer is the insurance-provider company or the insurance carrier or the underwriter. Insurers provide financial protection or reimbursement in addition to the policyholder in some instances.
The insurance company promises to provide insurance coverage for a certain amount of premium, known as ‘policy limit’, against which it charges a premium. The policyholder pays a certain amount known as ‘premium’ to the insurance company against which it provides insurance coverage.
The insurer ensures that it covers the policyholder’s losses subject to certain conditions and terms. Premium payment determines the amount of insurance coverage or ‘policy limit’ that is assured.
What is Deductible? Why Pay Deductible if Premium is Paid?
You may have an insurance claim that is less than the premium amount in which case you first have to pay the remainder and then claim the insurance money.
The term ‘deductible’ refers to the extra amount to be paid in such circumstances. You may negotiate a lower premium and higher deductible with the insurer.
Features of Insurance Coverage
Insurance coverage has the below mentioned salient features:
- A risk management plan includes the use of an insurance policy as a hedge against an uncertain loss.
- The amount of damage that can be covered up by insurance is not affect the magnitude of the loss. It only assures that the loss is shared and distributed among multiple people
- An insurance company pools its clients’ premiums, so when a few of them suffer a financial loss, the claimed money is distributed out of the pooled fund. Each customer pays a minimal fee for this behaviour.
- Medical expenses, vehicle damage, property loss/damage, and other damages can be insured for, depending on the type of insurance.
- The main components of an insurance coverage policy are premium, policy limit, and deductible. The policy buyer should examine them thoroughly while purchasing an insurance policy.
Benefits of Insurance Coverage
An insurance policy has several benefits, but it also performs various functions. Here are some of its most fundamental benefits, as well as some of its more secondary and the rest are additional ones. Insurance coverage’s basic functions include:
1. Provides Protection
Insurance coverage can reduce the impact of a loss if and only if financial troubles are present. It provides monetary compensation during financial crises. It also reduces mental strain caused by financial problems.
2. Provides Certainty
The policyholders are provided with a certain amount of security in the form of insurance coverage. The insured pays a small portion of the income for this security that will help in the future. When a certain amount of danger or accidents are encountered, the premium is paid in order to protect the policy holder.
3. Risk Sharing
It is the very way in which insurance policy operates that makes it a cooperative arrangement. An insurer would be unable to pay out from his capital.
A collective risk and premium pool is formed by an insurance company because it covers a large number of risk-exposed individuals. All policyholders receive part of the risk of the individual who actually incurred the damage.
4. Value of Risk
An insurance policy assesses the amount of risk and also considers the various causes of it. It covers a risk value and pays a premium based on a risk value basis. It safeguards against unforeseen events and consequential loss.
An insurance coverage policy has some additional benefits and secondary functions besides the above mentioned features. It also has some other advantages and secondary functions that it performs such as the ones mentioned above:
Capital Generation
The insurance company can use the lump sum from the premiums to invest in money market instruments or other productive channels.
Making income and profit for the company is accomplished by investing this lump sum in stocks, mutual funds, and other productive avenues. The company can safeguard itself against the loss of capital by investing this lump sum in money market instruments.
Economic Growth
An insurance policy mobilizes domestic savings to provide financial stability. It also directs towards loss mitigation by reducing damage or destruction for the insured population. It spreads the risks by also promoting trade and civilisation.
Saving Habits
An insurance policy can teach individuals to establish saving habit. The premium that will cover any future unforeseen circumstances will serve as a guard. Many insurance policies are incorporated as insurance-cum-savings or insurance-cum-investment schemes. This encourages individuals to save and invest even more.
Types of Insurance Coverage
General insurance policies can cover expenses related to medical problems, vehicle damage, loss in business or accidents while travelling, etc.
There are several types of insurance coverage that comprise Life Insurance and General Insurance. General Insurance can be further divided into sub-categories that comprise different types of policies. These are:
Life Insurance
An insured person can receive a death benefit from a life insurance policy in order to protect the family from premature death or death while on the policy.
This provides the family with a lump sum when the insured person dies prematurely. When the family does not have a breadwinner, financial difficulties may arise.
Is Term Insurance the same as Life Insurance?
Term Insurance is the most popular form of life insurance, in which you pay for the term and then receive the money. If you die within the term period, the family gets the money. However, if you survive through the term policy’s tenure, your entire life insurance or endowment policy pays out.
Some Pension Plans, post-retirement programs also cover term insurance. You may pay the premium up to a certain time. When the insured reaches maturity, the family gets the money. However, Term Insurance is one of many types of life insurance plans.
What is Unit Linked Insurance Plan?
Market-linked equity, debt, and other instruments are covered in Unit Linked Insurance Plan, which is an investment-cum-insurance plan. The premiums provide coverage as well as they are for the purchase of units of market-linked equity, debt, and other instruments.
This has the potential to provide an opportunity for wealth creation apart from the life cover provision. Life Insurance Coverage Plans also provide tax advantages under Section 80C.
General Insurance
Home, auto, education, and other non-life insurance policies can be grouped together as general insurance policies because of the non-life insurance policies.
1. Health Insurance
You can purchase health insurance for yourself or for your family that may include your spouse, parents, siblings, and children. Some insurance companies have tie-ups with hospitals. You may use your policy number to access in-network hospitals through a cashless service.
In other cases, you may receive reimbursement for hospitalization and treatments. Check the coverage of the condition/health issue. Also, determine what kind of expenses are covered.
2. Education Insurance
Education insurance can also be a money-saving investment scheme. You pay a premium by the time your child is 18 years of age or attains a certain age as specified by the insurance policy. You may have a lump sum with limited regulations that you may use for a child’s educational purposes, and not others.
Use an education calculator to estimate the amount you’ll need when your child grows up. The policy is owned by the parent/guardian/legal guardian.
3. Home/Property Insurance
With this insurance policy, you can cover the financial loss caused by man-made or natural catastrophes and receive monetary aid. If your property is damaged by theft, floods, or any other mishaps, the policy can cover the financial loss and provide monetary aid.
4. Motor/Auto/Vehicle Insurance
According to current traffic rules, you must carry insurance papers while driving. This is one of the mandatory policies in current times. It protects your valuable asset against road accidents or any other damage, and covers the losses. Secondly, the traffic rules suggest you carry insurance papers.
5. Travel Insurance
When you book a rail or air ticket, you may choose to pay for insurance or buy travel insurance. Alternatively, you may buy travel insurance as a frequent flyer if you travel internationally. Baggage loss, flight cancellation, or late-flight delay can all be claimed for.
There are plenty of miscellaneous insurance policies for furniture, goods, machines, etc. Apart from the kinds of insurance discussed above, there are also miscellaneous insurance policies such as Fire Insurance (damage due to fire), Marine Insurance (for cargo ships), Tenant Insurance, Landlord’s Insurance, and so on. Group Medical Insurance Policies often cover the employees of an organisation if they have any.
Wrapping it up:
Having coverage insurance helps you to prevent burning a huge hole into your pocket in uncommon seasons. It provides financial assistance for your damages and expenses. The insurance covers a wide range of damages, including property damage.
It brings in a lot of people who pay to cover their risks in order to control the risk. It also uses the funds for capital formation in the markets. This helps the insurance companies to keep operating and settling/adjusting the claims of the insured people. It also boosts the economy.
FAQ
What are the tax benefits of insurance coverage plans?
The tax benefits of insurance coverage plans depend on the type of insurance as well as the policy. However, mostly the life insurance policies offer exemption from tax under Section 80C of the Income Tax Act up to Rs. 1.5 lakh. In certain cases, the health insurance policy for self and parents is also tax exempted under Section 80C.
Which type of insurance coverage is most important?
All types of insurance coverages are important but it depends on the individuals and their circumstances as to what shall be their priority. Having health insurance is important and getting insured for all your motor vehicles.