Insurance is a contractual agreement between an individual and an insurance company. The insurer agrees to provide financial coverage against specified risks in exchange for regular premium payments. Various types of insurance, from life and health insurance to property and casualty coverage, are tailored to address different needs and risks.
Each type serves a unique purpose, safeguarding individuals, families, and businesses against potential losses. Insurance benefits extend beyond financial protection, providing reassurance and stability in times of crisis. Whether securing your loved ones’ future or safeguarding your assets, insurance promises resilience and security in an unpredictable world.
Key Takeaways
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Let us first answer the most common question: What is insurance?
At its core, insurance is about protection and financial preparedness. It acts as a safety net against unforeseen losses, ensuring that if an unexpected event happens, you receive compensation to help you recover and regain stability.
For instance, if the policyholder passes away during the policy term, the insurer provides the agreed sum assured to the nominee. This amount helps the family manage ongoing expenses, repay debts, or secure future goals such as education or retirement.
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The insurance policy is a legal agreement between the policyholder and the insurer that specifies the claims that the insurer must pay under the law. Under the terms of the policy, the insurer agrees to pay for losses resulting from risks covered in exchange for a payment known as the premium. To understand how insurance works, you should know the following terms:
Must read: What is not covered in Life Insurance?
The insurance policy lists all the policy conditions and circumstances under which the insurance company is liable to pay you or the nominee the coverage amount.
When you buy an insurance policy from the insurance company, you will make regular payments (premiums) for a specified period towards the insurance policy.
The insurance company collects the premiums from all the policyholders. They pool the money for losses arising from an insured event.
You can claim benefits during the policy tenure. It depends on the policy type and the conditions.
Also Read - Different types of insurance policies
Insurance policies span a diverse spectrum, each tailored to meet specific needs and circumstances. Although classified into various categories, they share the common goal of offering a safety net in times of uncertainty, thereby promoting stability and resilience in personal and professional spheres.
There are largely two types of insurance policies based on insurance principles:
| Life Insurance | General Insurance |
|---|---|
| Term Life Insurance | Health Insurance (Mediclaim) plans |
| Endowment Life Insurance | Vehicle Insurance |
| Moneyback Plans | Fleet Insurance |
| Savings Plans | Home/Property Insurance |
| Child Education Plans | Fire & Hazards Insurance |
| Unit Linked Insurance Plans (ULIPs) | Travel Insurance |
| Keyman Insurance | Liability Insurance |
You can avail of insurance benefits under the following two types of policies:
| Individual Insurance | Group Insurance |
|---|---|
| It caters to an individual and is customised as per one's needs and requirements. | These are insurance companies drawn in the group's name. |
| The premium amount is decided based on your age, family medical history, health, etc. | The premium amount is general and gets deducted from your salary. The group cost is lower. |
One of the most valuable aspects of having insurance is the peace of mind it offers. By paying a relatively small and regular amount, you build a sense of security knowing that if life takes an unexpected turn, you’ll have financial support to rely on. From relieving your worries about unexpected expenditures in the monthly budget to finding solutions for adverse financial circumstances, insurance is what pulls you off the bandwagon of unnecessary stress.
Here are some more reasons that make insurance an important part of financial planning.
Provides Financial Stability: Whether it is medical insurance against sudden health-related emergencies or life insurance that secures children’s education and marriage after your passing away, insurance offers protection against unexpected expenses. It saves you from limiting the regular budget and paying out of pocket, keeping your lifestyle stable. Some term insurance plans offer a ‘return of premium’ option, where premiums are refunded if the insured survives the policy term.
Supports Long-Term Wealth Growth: Many people are forced to break into their lifelong savings simply because they don’t have insurance to cushion unexpected financial shocks. Having insurance allows you to keep those savings plans intact. Moreover, these days, life insurances come with savings and investment combinations, such as Endowment plans or Unit-Linked Insurance Plans (ULIPs), allowing you to generate long-term wealth while providing life coverage.
The origins of modern insurance can be found in the London Fire of 1666. Due to the severity of the fires, insurance became essential rather than optional.
Source: Investopedia
Listed below are the key features of an insurance plan that you should consider:
Insurance is a tool for risk transfer.
Insurance is a community solution, as several people who are exposed to the same risk pool their funds together to bear the loss.
The contract is based on the ‘utmost good faith’ principle, unlike other business contracts.
Insurance cover does not affect the chance of loss, but it reduces the financial impact of the loss.
As a party to the insurance contract, you should always try to avoid, mitigate, and minimise the losses.
You can only insure against risks that are unpredictable in occurrence and magnitude.
Speculative, financial (betting), and business risks cannot be insured.
Given below are some of the important benefits of insurance:
Financial Safety for Family: Insurance provides cover against life's uncertainties and protects you against losses arising from different unexpected events in life.
Wealth Creation Goals: Insurance policies like ULIPs give you investment opportunities and help you fulfill your essential financial goals.
Wealth Preservation: Life insurance policies like Endowment and Money-back plans provide stable long-term returns with life cover, though they may not fully protect against inflation.
Wealth Distribution: Few investment plans offer the kind of safety offered by life insurance plans. After retiring at the age of 60, you can live up to 100. Life insurance pension plans can guarantee a regular income for that period.
Insurances come with some exclusions, too, and you should be aware of them before getting one. Understanding these exceptions allows a person to be prepared and learn how to avoid them from claiming insurance at times of need. While life insurance offers vital financial protection, it's important to know that not every situation qualifies for a payout.
Life insurance excludes death due to suicide in the first year of the policy, pre-existing conditions (unless disclosed and accepted), drugs/alcohol abuse, hazardous sports, and illegal activity. These situations may vary from insurer to insurer, but the basic criteria where one cannot claim life insurance are:
Life insurance excludes death due to suicide during the initial exclusion period (usually the first year, though this may vary by policy)
When the death occurs due to any pre-existing health condition, if not declared at the time of policy purchase
When the policyholder is under the influence of drugs or alcohol at the time of the accidental death
When the policyholder dies due to participation in hazardous adventure sports such as skydiving, bungee jumping , unless specifically covered
When the cause of the policyholder’s death is active participation in an illegal activity
Note: Some policies may also exclude deaths related to war, terrorism, or pregnancy complications, depending on the insurer’s terms and conditions.
Learn more - what is not covered in life insurance plans?
Insurance plays a vital role in our lives. It helps us financially in different stages of our lives.
Listed below are different types of life insurance coverage that one should have:
Term Insurance Plan: This is the purest form of life insurance, wherein you pay a premium towards the policy, and in case of your death during the policy tenure, the nominee receives the sum assured. With term insurance, you can receive high coverage at a lower premium.
Retirement Plan: A retirement plan is a type of life insurance that focuses on ensuring your financial stability and security after retirement. Investing in retirement plans might help you establish a consistent income stream. If you continue to invest until retirement, the plan will help you cover your retirement needs. Retirement plans also include death benefits. If the policyholder dies within the insurance term, their beneficiaries will get an assured sum.
Child Plans: A child insurance plan is an investment savings plan that offers financial security for the child's future in the event of the policyholder's unexpected passing. It is perfect for making sure the child's future needs are met, even if the life insured isn't around. You can buy the best child insurance plans to satisfy your child's financial needs for college, marriage, or to accomplish a host of other financial objectives.
Along with providing financial security, insurance also offers tax benefits. Here are some of the tax benefits offered by insurance:
| Section | Description | Tax Benefit / Limit |
|---|---|---|
| Section 80C | Deduction on life insurance premiums paid for self, spouse, or children | Up to ₹1.5 lakh per financial year |
| Section 80D | Deduction on health insurance premiums paid for self, family, and parents | Up to ₹25,000 for self and family, plus an additional ₹25,000 for parents (₹50,000 if parents are senior citizens) |
| Section 10(10D) | Exemption on life insurance policy proceeds, including maturity value and death benefit | Tax-free, provided the annual premium does not exceed 10% of the sum assured. For life insurance policies issued on or after 1 April 2023, if the aggregate annual premium across one or more policies exceeds ₹ 5 lakh, the exemption under Section 10(10D) may not be available except in the case of death benefit |
Note: The tax benefits mentioned above are subject to change as per prevailing tax laws. It is advisable to consult a qualified tax advisor for personalised guidance.
Insurance is a financial arrangement that protects against the risk of loss or damage to assets, health, or life. It operates on the principle of pooling risks among a large group of individuals or entities who pay premiums into a common fund. In return, the insurer promises to compensate for covered losses or liabilities.
Insurance benefits are manifold: they offer security by mitigating financial risks, providing financial security to individuals and businesses, helping manage uncertainties, and facilitating recovery from unexpected events. Additionally, insurance is crucial in promoting economic stability by spreading risks across society and encouraging investments and entrepreneurship while managing risks and safeguarding against unforeseen circumstances.
But for insurance to serve its purpose well, it’s essential to understand what each policy covers, what it excludes, and how to choose based on your life stage and goals. Read the fine print, disclose honestly, and review your policies regularly. The real power of insurance lies not just in having it, but in using it wisely.
Sum Assured: It is the amount the life insurance company pays to the nominee if the insured event happens (death of the insured)
Maturity Value: The amount of money paid out when a life insurance policy matures is known as its maturity value.
Risk Transfer: It is a method where a pure risk can be contractually shifted from one party to another as part of risk management and control
Insurance is a financial safety net that protects you or your family against unexpected losses or risks. It ensures financial stability by providing compensation in times of emergencies such as death, illness, or accidents. It is needed to secure the future, reduce financial stress, and safeguard loved ones from unforeseen hardships.
Life insurance is crucial for anyone who wants to provide financial protection for their loved ones in case of their unexpected demise. It's particularly important for those with dependents, such as spouses, children, or ageing parents, who rely on their income for financial support. Additionally, individuals with outstanding debts, such as mortgages or student loans, may benefit from life insurance to ensure those debts are covered in the event of their death.
The term "waiting period" refers to the amount of time you must wait before receiving insurance benefits in health insurance programmes. The insured cannot make any claims for health insurance benefits during this period, which starts on the date the policy is initiated.
The goal of insurance is essentially defeated by non-renewal. An insurance policy's primary goal is to give your family security in your absence. But if you don't renew your policy when it matures, it lapses, and your family loses the protection you have been paying for all this time.
The amount of money paid by an individual, organisation, or corporation to get insurance coverage is known as the insurance premium. It is the cost of receiving protection from a loss, danger, or injury.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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