Insurance is the most effective risk management tool which can protect individuals and businesses from financial risks arising out of various contingencies. The emotional and psychological loss can never be compensated, but at least the financial loss can be compensated with insurance. Though there are uncertainties in life which you cannot mitigate, but insurance will surely help you transfer the financial risk associated with the same.
What is insurance?
Insurance is a legal contract between two parties- the insurance company (insurer) and the individual (insured), wherein the insurance company promises to compensate for financial losses due to insured contingencies in return for the premiums paid by the insured individual. In simple words, insurance is a risk transfer mechanism, where you transfer your risk to the insurance company and get the cover for financial loss that you may face due to unforeseen events. And the amount that you pay for this arrangement is called premium. There is insurance available for various risks, starting from your life to mobile phones that you use. In the end, it’s essential to protect what is ‘important’ to you.
How does insurance work?
The concept of insurance works on the basis of ‘risk pooling’. When you buy any type of insurance policy from the insurance company for a specified period with specific cover, you will make regular payments (referred to as premiums) towards the policy. Similarly, Insurance Company collects premium from all of its clients (referred to as insured) and pools the money collected to pay for losses arising out of an insured event. In case the insured event takes place, and you make a claim, losses will be compensated by the insurance company from the pool of policyholder’s premiums. In case you don’t make a claim during the specified policy period, no benefits will be paid to you. However, there are various types of products offered by insurance companies today which also involve savings element attached to it.
What is the deductible in insurance?
Deductible refers to the amount of the claim that is incurred by the policyholder. The deductible amount, as the name suggests, is the amount that is deducted from the claim amount of an insurance policy. For instance, if the agreed deductible is INR 20,000 and the claim raised by the policyholder is ₹40,000 then the insurance company will only pay INR 20,000 to the policyholder. This, in turn, specifies that if only the claim amount exceeds the deductible amount, the insurance company will pay you.
The higher the deductibles, the lower is the premium of the particular insurance plan and vice-versa. Deductibles play a vital role in deciding the practicality of your future claims. So, it is vital to pay utmost heed when deciding the deductibles for your insurance plan.
Key features of insurance
Insurance policies are the much-needed support pillar one requires at the time of need. The salient features of insurance are
- Easy to purchase
One of the features of an insurance policy is its ease of purchase. Due to the widespread use of the internet, people can now easily purchase a policy by sitting in their comfort zone. Most insurance companies provide the option of both online and offline purchases of the policies so people can choose as per their comfort.
- A partner in a financial crisis
The basic purpose of an insurance policy is to provide financial help when in need. Be it health, vehicle, or any other insurance policy, the aim is to extend the monetary aid.
- Abundant options
The current insurance market is full of a number of options. A customer need not stick to a few options. There is great flexibility to surf all the options available and then make the final decision.
- Benefits of insurance
One insurance policy provides a number of benefits. Right from providing financial coverage to tax benefits and so on, insurance cover provides wide coverage.
There are several occasions when the insurance company provide offers for the policyholder. It may be a reduction in the renewal amount or anything as such. No claim bonus is also a happy moment. It is the bonus provided for making no claims in a policy year.
- Insurance for every precious thing
There is the facility of insurance for almost all precious and luxury things. Apart from the life insurance, you can get a cover for your vehicle, home, mobile, jewellery, etc.
- A cover for family
Insurance policies are not limited to covering only one person. When it comes to a life insurance policy, several plans allow a policyholder can get their whole family covered.
- The ease of insurance premium calculator
Almost all the insurance companies provide the easy of insurance premium calculator. An individual can calculate the lumpsum premium he will have to pay in lieu of the insurance cover. It makes it easier for the customers to decide their deal.
Types of insurance available
There are various types of insurance products available in India. Mainly, insurance products are classified as:
- Life insurance products
- General insurance products
Life insurance covers you against the risk of death. Life insurance policies come in many variants such as term plans, endowment plans, whole life insurance plans, money back plans and unit-linked investment plans etc. Many life insurance products can be a great tool for long-term savings also as it comes as a combination of protection and savings. General insurance products cover financial losses caused by various risks other than death. General insurance products come in various types covering a wide range of risks such as health insurance, motor insurance, marine insurance, liability insurance, travel insurance and commercial insurance etc.
Insurance is an effective risk management tool that protects what is precious for us –life, health, home and businesses etc. The requirement of insurance may vary from one individual to another, but there are certain types of insurance products that are must-have for every individual for ensuring a secure future.
Must-have insurance products
Knowing the importance of insurance is the need of the hour. Following insurance products are the must-have for any individual today.
- Life insurance:
As no one wants to leave their loved ones financially shattered, life coverage is one of the must-have for every individual having dependents. In case of life insurance, the sum assured or the coverage amount will be paid out to the nominee of the insured in the event of the death of the insured. Life insurance is a crucial requirement to ensure the financial well-being of your loved ones even in your absence. The coverage amount opted should be able to provide complete financial protection – to replace income loss, to repay debt and also to create a financial buffer that can be utilised by insured’s family for future financial stability. Though life insurance products come in many variants, it’s important to first avail the term insurance with adequate coverage.
- Health insurance:
Health uncertainties are part of life. Keeping in mind the rising cost of healthcare and an increasing number of diseases, it’s important to have the financial cushion to protect yourself against health contingencies. Health insurance policies are of many types such as individual health insurance, family floater health insurance, critical illness health insurance and senior citizen health insurance. It’s important to have adequate health insurance coverage that can protect you from financial crisis during medical emergencies.
- Motor insurance:
Motor insurance policies are the mandatory legal requirement in India for every vehicle owner under the Motor Vehicle Act. Be it two-wheeler, car or a commercial vehicle, its compulsory to avail third party liability motor insurance to protect oneself against the claims that may arise from another party during an accident. However, motor insurance policies come in a comprehensive package wherein your valuable assets (bike or car) are covered against the various risk of damage or loss along with the personal accidental cover to you as the owner. Keeping in mind the rising incidents of road accidents and the asset value, it’s most important to have a comprehensive motor insurance policy.
- Accident and disability insurance:
Accidents are unexpected and are inevitable. Sometimes accidents can result in disabilities that can further have huge impact on your earning capacity. In order to have financial stability for yourself and your family, it’s important to be insured against accidents.
- Home insurance:
Home is one of your most valuable possessions that also includes many precious belongings and memories. Though you try to secure it to the fullest, your property is exposed to various risks like theft, damages due to natural disasters etc. which you may not be able to mitigate completely. Hence, in order to protect your home against losses and damages that may arise due to many insurable events, availing home insurance is the most effective solution.
Though you need to be prepared for future uncertainties by availing insurance cover, you may not need all types of insurance. The priority of any insurance product may vary depending on your individual need. Insurance is a large industry with numerous product types available to cater to every sort of need. Some of them mentioned already are of top priority for every individual. Priority of rest other types of insurance may purely depend on your unique need or situation. Let’s take a look at some of the insurance types that are of lesser priority.
- Standalone critical illness insurance:
Critical illness insurance plan may not be needed for every individual, specifically, if you do not have any family history of critical illness. Critical illnesses are sometimes covered in health insurance plans and also comes as a rider along with life insurance plans. Hence, a standalone cover for critical illness depends purely on the requirement of an individual.
- Travel insurance:
Travel insurance may be the priority for frequent travellers. But, it may not be needed for all. The need for insurance may vary depending on each individual’s unique needs. For example, if you are planning a domestic trip and your comprehensive health insurance plan covers you across the country for any medical emergencies, travel plans may not just be needed for you. More specifically, the travel insurance plan may not be your priority if you can afford to lose your pre-paid trip expenses. Sometimes travel covers also come as your credit card travel benefit.
Likewise, there are many insurance types that are not suitable or required for every individual. It’s important to think about the benefits that you can reap before investing in an insurance plan.
How to decide on the type of insurance you need?
Before you buy any insurance, it’s important to understand the need for insurance. Here are certain things to keep in mind at the time of deciding what type of insurance you need.
- Purpose of cover
- Risks that you want to be covered against
- How long you might need the coverage
Components of life insurance:
When trying to learn what insurance is, it is important to understand its different components. Now that you have gone through the insurance meaning, take a look at some of its components too:
- Long-lasting coverage:
When it comes to life insurance definition, coverage is an important component. Life insurance coverage can be permanent and last a lifetime. There are policies that can cover you till the time you turn 100 years, making it a secure way of leaving a legacy behind.
- Death benefit:
The worry of your family being financially vulnerable in your absence can be a major concern for the primary earner. The death benefit helps build a safety wall around your family that would help them manage their lives comfortably without compromising on their dreams and aspirations.
- Levelled premiums:
One of the most important components of your life insurance policy is the premium. The premium depends on the chosen sum assured, the frequency of premium payment, and the policy’s tenure. However, a great feature of a life insurance policy is that the premium remains constant throughout the term of the policy. It is, therefore, often recommended that life insurance should be purchased as early in life as possible.
- Maturity benefit:
A number of life insurance policies come with the option of a maturity benefit, where a maturity benefit is payable if the insured individual survives the policy term. Thus, the policy acts as an investment vehicle that offers guaranteed and/ or non-guaranteed benefits.
Comprehensive life insurance plans also allow liquidity in partial withdrawals in Unit Linked Plans or loans against the collected surrender value post a specified policy period for Endowment Plans. This makes your policy act as an emergency fund that you may use in case you need some financial help.
List of benefits and importance of insurance
Insurance is a risk management tool not only benefits the individual and businesses but also benefits the society and economy in numerous ways. Following are some of the important benefits of insurance:
- Provides peace of mind:
Insurance provides protection against various uncertainties that can put you or your family in financial crisis. By covering the uncertainties of human life and businesses, insurance provides a sense of security. Having life insurance gives you peace of mind that the financial stability of your family will remain intact even when you are not around. Having health insurance gives you a sense of security that you do not need to shell out all your savings in the event of medical emergencies.
- Promotes risk control:
As insurance works on risk transfer mechanism, it promotes risk control activity.
- Promotes economic growth:
As insurance funds are invested in various projects like water supply, power and roads etc, it contributes to the overall economic growth of the nation. Also, insurance provides employment opportunity to people. Insurance contributes to economic growth in many other ways such as getting Foreign Direct Investment, paying taxes on the profit earned and by investing in the capital market etc.
- Distribution of risk:
Risk of insurance is spread across various individuals and organisation instead of concentrating on only one.
- Helps to get loan easily:
There are loan facilities offered against insurance policies. In case of home loans, having an insurance cover can help to get the loan easily from the lender.
- Inculcates savings habit:
There are many life insurance products that come with investment cum protection benefit. Such products inculcate a regular saving habit among individuals. Plans like endowment insurance plans help in achieving long-term financial goals. Pension plans help to receive regular income flow in older age.
- Provides tax benefit:
Insured gets the tax benefits for premium paid depending on the insurance product type. For example, the premium paid towards life insurance plans qualifies for tax deduction under Section 80C of the Income Tax Act. And, the premium paid towards health insurance plans qualifies for tax deduction under Section 80D of the Income Tax Act.
- Financial safety for the family:
One of the biggest benefits of having insurance is that you can safeguard your family. For example, a life insurance policy pays out a lump sum death benefit to your loved ones in case of your death, which can help them sustain a comfortable livelihood.
- Safety of financial status:
The right insurance policy can assure your safety if an unforeseen accident brings financial burdens on you. Be it your own safety or the safety of your business, property or valuables, in case of a mishap; you would not have to dig up your hard-earned savings.
- Wealth creation goals:
In the case of a comprehensive life insurance plan, you receive a maturity benefit at the time of maturity. This amount, generally received in a lump sum, can be very helpful in fulfilling a number of financial requirements. For example, as a retirement fund, money to buy a house, go on a foreign holiday or pursue your hobbies.
- Wealth preservation:
An insurance policy can be instrumental in managing and safeguarding your financial future. Suitable plans can help in reducing the risk element in your financial portfolio. It can eliminate uncertainties or offer you the funds to manage them without disturbing your savings.
- Wealth distribution
When more and more people opt for insurance, the insurance ecosystem gets help at large. It helps in spreading out the risk, thus making the insurance premiums more affordable for everyone.
Following are some of the examples that demonstrate the importance of insurance:
- Case 1:
Ram, a software engineer living in Bangalore meets with an accident and dies on the spot leaving his wife and son in deep emotional shock. He was just 40! He also has a home loan of INR. 30 lakhs running. Luckily, Ram has taken a term insurance cover of INR. 1 Cr. at the age of 32 years for 25 years of the policy tenure. His wife received compensation from the insurance company within 10 days which helped her pay off the debt and invest the corpus for future needs. If he had not taken the wise decision of investing in life insurance, his family would have been a huge financial crisis today! Insurance is important to secure your family’s future.
- Case 2:
Sunil, an employee in a multinational company in Mumbai suddenly fell unconscious due to high fever. He was then rushed to the nearest hospital. He was admitted for 3 days in the hospital for diagnosis and treatment. When he was discharged after 3 days, his hospital bill came up to around INR. 70,000. Luckily, he had taken a health insurance coverage for INR. 3, 00,000. As the hospital was listed in the network hospitals of his insurer, bills were directly settled to the hospital. If he had not known the importance of insurance, he would have to pay INR.70, 000 out of his pocket. Insurance helps you to have financial stability during unforeseen events.
To conclude, shield your life and important assets against all the uncertainties with the help of insurance. Know what insurance coverages you need, compare and invest wisely. It’s important to understand that the need for insurance is to secure what you love.
Deductibles are charged with the motive to restrict policyholders from making unnecessary claims. If there will be no deductible limit, the policyholder may raise small claims.
When the claim amount is less than the deductibles, the policyholder is not liable to get any claim amount. The obvious rule of deductibles is, you get the claim amount if only the claim amount exceeds the deductible amount.
As a policyholder, you do not need to pay the deductibles to the company. Rather, it refers to the amount of claim that is incurred by you. For instance, if you raise a health insurance claim of ₹30,000 considering the deductible is ₹10,000 then you shall only receive ₹20,000 as the claim benefit from the insurance company.
Yes, a deductible is liable to reset every new policy year.
Copay refers to the fixed amount or percentage of the claim that the policyholder agrees to pay. For instance, suppose the Copay is 10%. If the claim is raised for INR 40,000 then the Copay incurred by the policyholder will be INR 4,000 and the rest of the INRV 35,000 will be incurred by the insurance company. While deductible is the fixed amount that the policyholder has to exceed in order to raise an insurance claim.
Copay is paid for each claim raised. However, deductibles are a one-time limit. Once the policyholder crosses the deductible limit, he/ she does need not to pay any other amount until the next policy year.