Insurance Meaning, Insurance Types And Merits

Insurance – The literal meaning of insurance would be an assurance against unforeseen and unfortunate loss. This means, that if you encounter a less-than-normal event in your normal course of life, and happen to incur a financial loss because of it, you can be compensated.

Insurance Meaning

Insurance is a legal agreement between an insurer (insurance company) and an insured (individual), in which an insured receives financial protection from an insurer for the losses he may suffer under specific circumstances.

Under an insurance policy, the insured needs to pay a regular amount of premiums to the insurer. The insurer pays a predetermined sum assured to the insured if an unfortunate event occurs, such as the death of the life insured, or damage to the insured or his property.

For example, you met with an accident on your way to the office in your car and the car suffers damage. Your insurer can reimburse the repair expenses in this case. However, the insurer will not reimburse normal wear and tear like a headlamp stopping working.

Legally insurance has been defined as a contract where the insurer agrees to compensate the insured against the losses incurred due to any unforeseen contingency. The contract also involves a consideration which is called a premium. The maximum available benefit amount is called the sum assured or the sum insured.

How Insurance Policy Works

To understand how insurance works, you should know below terms:

  • Premium: is the money you pay to the insurance company to avail of insurance policy benefits.
  • Sum Insured: Sum insured is applicable for a non-life insurance policy like home and health insurance. It refers to the maximum cap on the costs you are covered for in a year against any unfortunate event.
  • Sum Assured: Sum assured is the amount the life insurance company pays to the nominee if the insured event happens (death of insured).

As discussed above, insurance is a legal contract between the insurer and the insured. The insurance policy lists all the policy’s 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 have to make regular payments (premium) for a specified period towards the insurance policy.

The insurance company collects the premium from all the clients. They pool the money for losses that may arise out of an insured event. If you don’t claim during the policy tenure, you may or may not receive any benefits. It depends on the policy type and the conditions.

Insurance Components

An insurance policy is made of multiple components. Some of the important parts of an insurance contract are:

Premium: This is the financial consideration that makes the insurance agreement a legally binding contract.
Policy Limit: 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 amount of loss you will bear out of your pocket. The insurer will start paying only when your losses (or expenses) exceed the deductible limit.

Insurance contract has 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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Types of Insurance Policies

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

  • Life Insurance Policy

It is insurance for 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 case of your death.

Health Insurance Policy

Although health insurance is usually counted as a general insurance contract, there are a few differences. Health insurance covers your medical costs for expensive 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 that is not related to life. Non-life insurance could be car insurance, home insurance, etc.

You can avail of insurance benefits under the following two types of policies:

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

Learn whether you should opt for a long-term or short-term health insurance policy.

Individual Insurance Group Insurance
  • It caters to an individual and is customized 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.

Key Features of Insurance

  • 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 minimize the magnitude of loss.
  • As a party to the insurance contract, you should always try to avoid, mitigate and minimize the losses.
  • You can only insure against risks that are unpredictable in occurrence and magnitude.
  • Speculative, financial (betting), and business risks cannot be insured.

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Insurance Benefits

There are a lot of benefits to buying insurance and listed below are some of them:

  • Financial Safety for Family: They provide cover against life’s uncertainties and protect you against losses arising from different unexpected events in life.
  • Safety of Financial Status: Certain events like medical emergencies can have a significant impact on your cash flow management. Insurance ensures you don’t have to pay out of pocket for such situations.
  • 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 moneyback 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 pension 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.

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Must-Have Life Insurance Policies

Insurance plays an important role in our lives. Be it a life insurance policy, or motor insurance, having insurance coverage helps us financially in different stages of our lives.

Listed below are different types of 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 against a lower premium. iSelect Smart360 Term Plan by Canara HSBC Bank of Commerce Life Insurance offers critical illness coverage against 40 listed illnesses.

  • Health Insurance Plan:

Knowing the rising cost of healthcare and the number of diseases you can have, it is wise to have a financial cushion against health contingencies.

A health insurance plan will cover the expenses of your healthcare expenses as per the health policy that you have.

  • Motor Insurance:

Motor insurance is mandatory for those who own a vehicle in India. It is compulsory to avail of third-party liability motor insurance. However, you can have a comprehensive package – personal accident cover that offers coverage against the risks of damage.

  • Home Insurance:

Your home is exposed to various kinds of risks like theft, damage due to natural calamities, etc. Hence to protect your home against such damages, you must avail of home insurance.
Such insurance plans will help you stay afloat even after a costly mishap or calamity.

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 Rs 1.5 lakh under Section 80C.
Under Section 80D, you can claim a medical insurance premium of up to Rs 25,000 for yourself and your family and an additional Rs 25,000 for your parents. The deduction limit rises to Rs 50,000 if the insured are senior citizens.

Under Section 10(10D), the life insurance benefits you or the nominee receives from the insurance company are tax-exempted. This means both maturity value and 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.