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.
1. What is Really An insurance Means?
Insurance is an arrangement with an insurance firm under which you pay them regular amounts of money and they agree to cover your costs if a certain unfortunate event occurs, for example a traffic accident, damage to property or illness.
Insurance, however, may also be arranged for a common event, e.g. if you reach a certain age. An event covered by insurance is referred to as an insurance event. The person to whom such an event occurs or may occur is called the person insured. When an insurance event occurs (you get ill, suffer an accident, reach a certain age), the insurer will pay you a certain amount of money referred to as an insurance benefit / claim paid. The insurance benefit / claim paid will help you or your family to overcome the financial difficulties or increased costs that may arise from an insurance event. This means that by arranging insurance you obtain insurance cover against a certain risk.
As any other service, insurance is not provided free of charge.
The insurer promises to pay you a benefit / claim amount as agreed in the insurance contract, upon the occurrence of an insurance event. The price you are to pay for this service is the insurance premium.
The person who takes out an insurance policy and pays insurance premiums is called the policyholder.
The insurance premium is payable in monthly, quarterly or annual instalments as a rule, but it may also be paid in a single payment.
the insurer may charge you various fees. Hence, ask the insurer how much you will be required to pay in fees and other costs.
2)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.
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
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:
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