What is Insurance? Importance, Types and Benefits Explained in Simple Words

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Insurance is an agreement with an insurance company where you pay them regular amounts of money. They agree to cover your expenses in the event of a particular accident, such as a car accident, property damage, or illness. However, insurance can also be arranged for a general event, such as reaching a certain age. An insured event is called an insured event. The person with whom such an event occurs or may occur is called the insured person. If an insured event (you get sick, have an accident, have reached a certain age), the insurer will pay you a certain amount of money, indicated as an insurance indemnity/paid claim. The paid insurance indemnity will help you or your family overcome financial difficulties or additional expenses that may arise due to an insured event. This means that by taking out insurance, you get insurance coverage against a certain risk.

Insurance

Insurance policies are used to hedge the risks of financial loss, large and small, that may arise from damage to the insured person or property or liability for damage or injury caused to a third party.

Like any other service, insurance is not provided free of charge. The insurer promises to pay you an indemnity/amount of indemnity stipulated in the insurance contract in the event of an insured event. The price you have to pay for this service is the insurance premium. The person who takes out the insurance policy and pays the premiums is called the policyholder. Typically, the premium is paid monthly, quarterly or annually, but can also be paid in one instalment.

Also, the insurer may charge you different fees. So ask your insurer how much you will need to pay fees and other expenses. This is especially important in the case of life insurance. Did you know that life insurance fee is relatively high, especially in the first few years?

How Does Insurance Work?

The insurer and the insured get a legal insurance contract called an insurance policy. The insurance policy contains detailed information on the conditions and circumstances under which the insurance company will pay the insurance amount to the insured person or nominee holders. Insurance is a way to protect yourself and your family from financial loss.

In general, premiums for large insurance are much lower in monetary terms. The insurance company takes on this risk of providing high coverage for a small premium because very few insured people end up asking for insurance. Therefore, you get insurance for a large amount at a low price.

Any individual or legal entity can apply for insurance to the insurance company, but the decision on insurance is at the discretion of the insurance company. The insurance company will evaluate the claim to make a decision. Typically, insurance companies refuse insurance to high-risk applicants.

What is a No Claim Bonus?

The no-claim bonus refers to the discount offered to policyholders that no health or car insurance claims are filed each year. With NCB policyholders, they can get either a higher insurance premium on health insurance or a discount on their premium amount when they renew their policy.

Is claim settlement ratio an important factor when choosing an insurance company?

Yes, the claims settlement ratio refers to the total number of claims settled by the insurance company to the total number of claims filed. By using an insurance company with a faster claim settlement rate, you can reduce the chances of your claim being rejected.

Types of Life Insurance Policies

When it comes to life insurance, there are seven different types of insurance policies. These:

Term Plan: The death benefit from a term plan is only available for a specific period, such as 40 years from the date the policy was purchased.

Endowment Plan: Endowment plans are life insurance policies in which a portion of your premiums go towards death benefits, and the insurer invests the rest. Maturity benefits, death benefits, and recurring bonuses are some of the types of donation policy assistance.

Unit Linked Insurance Plans, or ULIPs: As with endowment plans, some of your insurance premiums go towards investments in mutual funds, and the rest goes towards death benefits.

Whole Life Insurance: As the name suggests, such policies offer a person life insurance instead of a fixed term. Some insurers may limit the entire life span to 100 years.

Child’s Plan: A child plan is an insurance policy with an investment premium that provides financial support for your children throughout their lives. The death benefit is paid in a lump sum after the death of the parents.

Money-Back: These policies pay a certain percentage of the guaranteed plan amount at regular intervals. This is known as a survival advantage.

Retirement Plan: Also known as a retirement plan, these policies are a fusion of investment and insurance. Part of the premiums is directed to the creation of a pension corps for the insured. This is offered as a lump sum or monthly payment after the policyholder retires.

Policy Limit

It is defined as the maximum amount that the insurance company is obliged to pay for covered losses under the insurance policy. It is determined based on the period (the duration of the policy), losses or injuries, and other similar factors.

Typically, the higher the policy limit, the higher the premium. For a life insurance policy, the maximum amount that the insurer pays to the nominee holder is called the sum insured.

Deductible

An insurance policy deductible is an amount or percentage that the policyholder agrees to pay out of pocket before the insurer begins settling the claim. You can also see it as a deterrent to small, insignificant claims that many people file with their insurance policies.

Deductibles apply to the policy or receivables as determined by the terms of the particular policy type. In general, insurance policies purchased with a high deductible are cheaper as higher costs for pocket-sized products result in fewer claims.

Tax Benefits of Insurance

Apart from the benefits of protection insurance policies, you can also take advantage of tax benefits.

Section 80C

The premium paid for the purchase of life insurance policies is eligible for a tax deduction under section 80C of the Income Tax Act. The upper limit for these deductions is Rs. 1.5 lakh.

Section 80D

The health insurance premiums paid when purchasing policies for yourself and your parents are also taxed under section 80D of the 1961 Income Tax Act.

Section 10 (10D)

Life insurance benefits that you or a nominee policyholder receive from an insurer are tax-exempt under this section.

The three most important types of insurance are:

Life Insurance:

Life insurance protects your family financially in the event of early death as you pay the insurance company regular premiums over a specified number of years. In return, the insurance company pays a guaranteed amount to your family if you die while running the policy.

There are different types of life insurance policies, and in some of them, you get a lump sum if you live for the life of the policy. For example, term insurance provides more coverage at a lower premium than other life insurance policies. But the policyholder is not paid money if he survives this period. Meanwhile, for policies like donation or return, the policyholder receives a lump sum payment at the end of the term. For such policies, the premiums are much higher than insurance coverage compared to term insurance.

Medical/Health Insurance:

Health insurance is a way to ensure that you and your family can get the best medical care without worrying about costs.

In the health insurance policy, the costs of medical treatment of the insured person (s) are covered by the insurance company. In exchange for the regular premiums you pay, the insurance company pays all costs associated with the illness for which the insured person needs treatment. This includes hospital admissions, daycare, postal services, pre-hospitalization, and more. And with bank transfer, your bill is paid directly between the company and the hospital.

Liability Insurance:

Such insurance is used to insure properties, cars, businesses and more. When purchasing liability insurance – such as car insurance, home insurance, business insurance, in case of damage to the insured object or property during the period, the insurance company will pay material compensation to the policyholder’s owner.

When you know which type of insurance is essential, let’s talk about why you need insurance.

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