What is Insurance? Definition, Types and Benefits

2025-07-15

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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

Insurance is a safety net that protects the policyholder or the beneficiary from unexpected risks not only by compensating monetarily but also by supplying resources at times.
It is essential to offer financial stability and long-term wealth accumulation.
There are many types of insurance, such as life insurance, health insurance, car insurance, home insurance, travel insurance, etc.
Insurance of all kinds has exclusions and varies from plan to plan. You must check for them before getting one.
Some insurance premiums are tax-exempt under sections 80C, 80D, and 10(10D) of the Income Tax Act, allowing you more ways to save money.

Insurance: Meaning and Definition

To answer the most common question, what is insurance?

First, understand the literal meaning of insurance. It means an assurance against unforeseen and unfortunate loss. This means you can be compensated if you encounter an unfortunate event and incur a financial loss because of it.

For example, you were in an accident on your way to the office in your car, and the car suffered damage. Your insurer can reimburse the repair expenses in this case. However, the insurer will not reimburse for normal wear and tear, like a headlamp that stopped working.

Legally, insurance is a contract in which the insurer agrees to compensate the insured against losses incurred due to unforeseen contingencies. The contract also involves a consideration called a premium. The maximum available benefit amount is called the sum assured or sum insured.

What is an Insurance Policy & How Does it Work?

The insurance policy is a legal agreement between the policyholder and the insurer that specifies the claims that the insurer must pay under 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 below terms:

Insurance Components:

Premium: A premium is the amount of money that an individual or business pays to an insurance company in exchange for coverage. This is the financial consideration that makes the insurance agreement a legally binding contract.
Policy Limit: The policy limit applies to health and general insurance policies where compensation depends on the amount of loss. The policy may limit the maximum compensation for certain types of losses.
Deductible: Deductible applies to general insurance and health insurance policies. A deductible is the maximum loss you will bear out of your pocket. The insurer will start paying only when your losses (or expenses) exceed the deductible limit.

Here is How an Insurance Policy Works:

The insurance policy lists all the policy conditions and circumstances under which the insurance company is liable to pay you or the nominee the insurance amount.
When you buy an insurance policy from the insurance company, you will make regular payments (premium) for a specified period towards the insurance policy.
The insurance company collects the premium 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.

Insurance contracts have been classified into two categories traditionally. These classifications are 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
	Liability Insurance
	Keyman Insurance

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Why is Insurance Necessary?

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 costs. It saves you from limiting the regular budget and paying out of pocket, keeping your lifestyle stable. There are term insurances that come with guaranteed return features that ensure your premiums return, so it is always a win-win case.
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.

Types of Insurance Policies

You can divide the insurance based on the type of coverage it provides as below:

Life Insurance Policy: It is insurance on your life. You buy life insurance to ensure that your loved ones are financially secure even when you are not around. If you are the only breadwinner, you would want your family members to maintain the same living standards in the event of your untimely demise. The nominee gets the sum assured in the event of your death.
Must Read - What is Life Insurance?
Health Insurance Policy: Although health insurance is usually counted as a general insurance contract, there are a few differences. Health insurance covers your costs for medical treatments.

You can avail of two types of health insurance policies:
- Mediclaim Insurance, which compensates you for the medical expenses
- Critical Health Insurance, which offers lump-sum payments for dangerous and life-threatening health conditions
Non-life Insurance Policy: These compensate for the losses sustained arising from a specific financial event unrelated to life. Non-life insurance could be car insurance, home insurance, travel insurance etc.

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. The premium amount is decided based on your age, family medical history, health, etc.	These are insurance companies drawn in the group's name. The premium amount is general and gets deducted from your salary. The group cost is lower.

Individual Insurance

Group Insurance

It caters to an individual and is customised as per one's needs and requirements.

The premium amount is decided based on your age, family medical history, health, etc.

These are insurance companies drawn in the group's name.

The premium amount is general and gets deducted from your salary.

The group cost is lower.

Because of these two variants, health insurance falls perfectly between general and life insurance policies. Also, both health insurance policies ensure complete financial safety for you and your family.

Did You Know?

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

Key Features of Insurance:

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 or minimise the magnitude of 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.

Benefits of Insurance

Given below are some of the imporant benefits of insurance:

Financial Safety for Family: They provide cover against life's uncertainties and protect you against losses arising from different unexpected events in life.

Wealth Creation Goals: Insurance policies like ULIPs give you investment opportunities and help you fulfil your essential financial goals.

Wealth Preservation: Life insurance policies like endowment and money-back plans are some of the safest long-term investments possible. These plans help you preserve your wealth from inflation and taxes for long periods.

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. Only life insurance pension plans can guarantee a regular income for that period.

Exclusions of Insurance Policies

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.

While life insurance offers vital financial protection, it's important to know that not every situation qualifies for a payout.

What’s Not Covered in Life Insurance?

Life insurance does not cover death occurring in certain specified circumstances. These situations may vary from insurer to insurer, but the basic criteria where one cannot claim life insurance are:

When the policyholder dies of suicide.
When the policyholder passes away during pregnancy or childbirth.
When the death occurs due to any pre-existing health condition.
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.
When the cause of the policyholder’s death is active participation in an illegal activity.

Learn more - what is not covered in life insurance plans?

What’s Not Covered in Health Insurance?

Health insurance providers do not cover some specific diseases. In that case, if you reach out to the insurer with such claims, they hold the discretion to reject those claims. Therefore, you should carefully go through the terms and conditions of the plan before making the purchase. Most of these exclusions are specific pre-existing diseases, certain procedures, alternative therapies, pregnancy, childbirth, cosmetic treatments, and dental treatments.

However, some of these excluded illnesses come with a waiting period; in the case of certain plans by Canara HSBC Life Insurance, after which you can avail yourself of them. Read the complete document, as the exclusions vary from plan to plan.

What’s Not Covered in Motor Insurance?

Wear and tear
Mechanical/electrical failure
Damage under the influence
Unauthorised driver
Illegal activities

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Must-Have Life Insurance Policies

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. The iSelect Smart360 Term Plan by Canara HSBC Life Insurance offers critical illness coverage against 40 listed illnesses.
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.

Tax Benefits of Insurance

Along with providing financial security, insurance also offers tax benefits. Here are some of the tax benefits offered by insurance:

You can claim a life insurance premium of up to ₹ 1.5 lakh under Section 80C.

Under Section 80D, you can claim a medical insurance premium of up to ₹ 25,000 for yourself and your family and an additional ₹ 25,000 for your parents. The deduction limit rises to ₹ 50,000 if the insured is senior citizen. Under Section 10(10D), the life insurance benefits you or the nominee receives from the insurance company are tax-exempt. This means both maturity value and the death benefit received from a life insurance policy will be tax-free. However, the maturity benefit is tax-free only if your annual premium for the policy does not exceed 10% of the base life cover in the policy.

Summing Up

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.

Glossary

Sum Insured: Sum insured is the maximum cap on the costs you are covered for in a year against any unfortunate event. It is applicable to non-life insurance policies like home and health insurance.
Sum Assured: Sum assured is the amount the life insurance company pays to the nominee if the insured event happens (death of insured). This term is used in life insurance policies.
Maturity Value: The amount of money paid out when a life insurance policy matures is known as its maturity value.
Risk Transfer: Risk transfer is a strategic method where a pure risk can be contractually shifted from one party to another as part of risk management and control.

FAQs Related to Insurance Policy

Insurance plans are helpful for those who want to shield their loved ones, possessions, and self from monetary danger or losses. These plans can cover unexpected medical expenses, hospital stays, the onset of illnesses and their treatment, as well as future medical needs.

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.