What is Insurance?

What is Insurance?

Insurance is a financial instrument that protects against the risk of potential financial losses. It is a contract between the policyholder and an insurance company, where the policyholder pays a premium and agrees to cover the cost of a specified loss or damage that occurs.

The basic purpose of insurance is to spread risk across a larger group of policyholders. By pooling risks, the insurance company can bear the financial burden of potential losses and provide coverage to those who need it. In return, policyholders pay small premiums, which is much more manageable than bearing the entire cost of a major loss themselves.

How Does Insurance Work?

As mentioned above, insurance is a legal contract between the insured and the insurance company. The insurance policy document contains all the information about the terms and conditions on which the insurance company will be liable to pay the benefit amount to the insured or the policy nominee. Let us under “What is Insurance?” with an example:

Suppose Akshay bought a term insurance plan of 1 crore and nominated his wife as his nominee. The policy tenure was 20 years, and he suffered an unforeseen death during the policy tenure. In this case, the life insurance company will pay INR 1 crore to the nominee of the policy, and the term insurance policy will end. Akshay’s wife can use this amount to cover their financial obligations, pay out any remaining loans, and maintain her current lifestyle.

Types of Insurance in India

Below are some of the major types of insurance available in India. Each type of insurance serves specific purposes and provides financial protection to individuals, families, and businesses in different areas of life and livelihoods.

• Life Insurance: Life insurance provides financial protection to the insured's family or beneficiaries in case of the insured person's death. It offers a variety of policies, such as term insurance, whole life insurance, endowment plans and unit-linked insurance plans (ULIPs).
• Health Insurance: Health insurance covers medical expenses incurred by the insured person. This includes hospitalization expenses, doctor consultations, diagnostic tests, and other related costs. Health insurance plans can be individual or family floater policies that cover multiple family members.
• Motor Insurance: Motor insurance, or vehicle insurance, covers damage or loss caused by a motor vehicle. It includes two types of policies: third-party liability insurance, mandated by law, and comprehensive insurance, which provides additional coverage for own damage, theft, and personal accidents.
• Home Insurance: Home insurance covers the structure and contents of the home against risks such as fire, theft, natural disasters and other dangers. It provides financial security to homeowners and helps them recover from possible damage or loss.
• Travel Insurance: Travel insurance covers various domestic or international travel risks. This covers medical expenses, trip cancellation or interruption, lost luggage, flight delays and other travel-related contingencies.
• Personal Accident Insurance: Personal accident insurance provides coverage against accidental injuries or death. It compensates for medical expenses, disability and loss of income due to accidents. This insurance may be especially beneficial for individuals engaged in high-risk occupations or activities.
• Critical Illness Insurance: Critical illness insurance provides a lump sum amount to the insured upon diagnosis of specified critical illnesses such as cancer, heart attack, stroke, kidney failure, or major organ transplant. The benefit amount can be used to cover medical expenses and other financial obligations during the treatment and recovery period.
• Fire Insurance: Fire insurance provides coverage against damage or loss caused by fire-related incidents. This includes coverage for residential, commercial, and industrial properties. Fire insurance helps individuals and businesses recover from fire accidents and rebuild their lives or operations.
• Marine Insurance: Marine insurance covers goods, cargo, and vessels involved in sea transportation. It protects against risks such as damage or loss of cargo during transit, accidents, theft, and natural calamities. Marine insurance is commonly used in international trade and shipping.
• Crop Insurance: Crop insurance protects farmers against losses caused by crop failure, pests, diseases, drought or natural disasters. It helps farmers stabilize their income and recover from agricultural losses, thereby ensuring the continuity of agricultural activities.

Different Categories of Insurance in India

Insurance is divided into three main categories: life insurance, general insurance, and government-sponsored insurance. In the table below, we have mentioned all different types of insurance into three main categories:

List of Insurance Companies in India

In the table below, we have mentioned the complete list of insurance companies in India.

Benefits of Insurance in India

In a country like India, securing your financial future and protecting yourself from unexpected situations is important. This is where insurance emerges as a powerful tool, providing a range of benefits for individuals and families:

• Financial Protection: Insurance protects you against medical emergencies, property damage, or unexpected events that affect your finances. It acts as a safety net and ensures you have the resources to recover and rebuild, whether from a serious illness or a natural disaster.
• Investment Opportunities: Some life insurance policies in India, such as whole life insurance, have a built-in savings component. These plans allow you to accumulate wealth over time while providing life insurance.
• Risk Management: Insurance plays an important role in managing and reducing risks. It allows individuals and businesses to transfer risks they cannot afford to an insurance company. Policyholders can avoid the potentially devastating financial consequences by paying relatively small premiums.
• Improved Access to Healthcare: Health insurance plans in India are important in making quality health care more accessible. Covering hospitalization expenses, pre- and post-hospitalization costs and even preventive care, these health plans encourage individuals to seek timely medical treatment without worrying about the financial burden.
• Investment Potential: Some life insurance policies in India offer a combination of protection and savings. These policies accumulate a corpus over time, providing a future financial safety net. They can be especially beneficial for long-term goals such as retirement planning or children's education.
• Business Continuity: Insurance is essential for businesses as it helps ensure their continuity and survival. Business insurance policies cover risks such as property damage, liability claims, business interruption, and other potential perils. Insurance enables businesses to recover, rebuild, and continue operating by providing financial assistance in times of crisis.
• Tax Benefits: The Government of India encourages insurance by offering tax exemption on premiums paid for certain policies. For example, health and life insurance premiums are eligible for tax deduction under sections 80D and Section10(10D) of the Income Tax Act. This makes insurance a tax-efficient tool for saving and planning for the future.
• Economic Growth: The insurance sector significantly influences India's overall economic growth. It mobilizes savings and deploys them in productive investments. Insurance companies invest the premiums collected in various sectors, contributing to capital formation, infrastructure development and economic activities.

What are the Add-on Riders Offered in an Insurance Policy?

An add-on rider is an optional benefit that a policyholder can purchase alongside the base insurance policy to enhance the coverage benefits of the policy by paying some extra premium amount. Below are some of the popular add-on riders offered in Insurance Plans:

What are Some of the Must Have Insurance Policies in India?

Some insurance policies are crucial for financial security in India. Here are some insurance policies that everyone should buy:

• Life Insurance: Life insurance is essential to provide financial security to your dependents in case of your untimely demise. This ensures that your loved ones are safe and can maintain their standard of living even in your absence. Term insurance, whole life insurance, and endowment plans are popular options for life insurance coverage.
• Health Insurance: As we know, healthcare costs are increasing every day, so it is important to have a health insurance plan. Health insurance covers medical expenses, hospitalization, surgery, and other healthcare-related costs. It protects your savings from being depleted due to medical emergencies and ensures access to quality healthcare services.
• Motor Insurance: Under the Motor Vehicles Act, your vehicle must have at least third-party liability insurance. However, it is advisable to opt for a comprehensive motor insurance policy that also covers damages to your vehicle. This protects you against financial losses due to accidents, theft, or damage to your vehicle.
• Home Insurance: A home insurance policy protects your property, belongings, and valuables against risks such as fire, theft, natural disasters, and other perils. It provides coverage for the structure of your home and its contents, ensuring that you can rebuild or replace damaged or stolen items.
• Personal Accident Insurance: Accidents can lead to disability or loss of income, affecting financial stability. Personal accident insurance provides coverage against accidental injuries, disability and loss of life. It provides financial assistance to cover medical expenses, rehabilitation costs, and compensation for disability or death due to accidents.
• Travel Insurance: Travel insurance is important if you travel frequently, domestic or international. This covers medical emergencies, trip cancellations, lost luggage, flight delays and other travel-related contingencies. Travel insurance ensures peace of mind and financial security during your trips.
• Critical Illness Insurance: Critical illness insurance provides a lump sum payment upon diagnosis of specified critical illnesses such as cancer, heart attack, stroke, kidney failure, or major organ transplant. It helps cover expensive treatments and medical expenses and provides financial support during recovery.
• Professional Liability Insurance: Professionals such as doctors, lawyers, architects, and consultants should consider professional liability insurance. This insurance protects against claims of negligence, errors, or omissions in their professional services and covers legal costs, settlements, and losses arising from professional liabilities.

Tax Benefits of Insurance in India

Insurance policies in India offer a range of tax benefits that can help individuals and businesses save on their tax liabilities. Here are some of the key tax benefits of insurance in India:

Section 80D

1. Section 80D allows you to claim a deduction on premiums paid for health insurance for yourself, your spouse, dependent children and your parents (up to certain age limits).
2. The maximum deduction amount varies depending on your age and your parents’ age:

• Up to INR 25K for yourself, your spouse, and your children.
• Up to an additional INR 25K for dependent parents below 60 years old.
• Up to an additional INR 50K for dependent parents above 60 years old.

3. Moreover, you can claim a deduction of up to INR 5K for preventive health checkups.

Section 80C

1. Under Section 80C of Income tax, you can claim a deduction for premiums paid on various life insurance policies, such as term insurance, whole life insurance, and Unit-Linked Insurance Plans (ULIPs).
2. The maximum deduction allowed under section 80C is INR 1.5 lakh per financial year. This limit is shared with other eligible investments, such as employee pension (EPF) contributions and public pension (PPF) investments.
3. There might be a minimum premium payment requirement or a limit on the sum assured to avail of the full deduction for life insurance premiums under Section 80C.

Section 10(10D)

1. This section offers tax exemption on the maturity benefit received from certain life insurance plans and the death benefit received from any life insurance policy.
2. However, certain conditions must be met to avail of this benefit. For instance, the maturity benefit from some ULIPs might be partially taxable if the investment tenure is less than 5 years.

Conclusion

Insurance is a fundamental financial tool that protects individuals, families, and businesses from risks and uncertainties. By understanding the different types of insurance and their benefits, individuals and organizations can make informed decisions to safeguard their financial well-being and secure their long-term goals.

What Is Insurance FAQs

1. What is the difference between a deductible and an exclusion?

Ans. The deductible is the initial amount you, the insured, are responsible for paying out of your pocket before the insurance company begins covering the costs in a claim. An insurance policy doesn't specifically cover an exclusion, no matter how much you pay in premiums or deductibles.

2. What happens if I cancel my insurance policy?

Ans. If you cancel your insurance policy, you may be entitled to a partial refund of your premium, depending on the terms of your policy and how long you've had it. However, you will also be left without coverage for the period you have cancelled.

3. How much does insurance cost?

Ans. The cost of insurance (premium) varies depending on several factors, including:

• The type of insurance
• The amount of coverage (sum assured)
• The insured's risk profile (age, health, driving record, etc.)
• The deductible (the initial amount you pay before the insurance kicks in)

4. What are the main types of insurance?

Ans. There are many insurance types, but some of the most common include:

• Life Insurance
• Health Insurance
• Property Insurance
• Liability Insurance
• Business Insurance

5. Can insurance premiums increase over time?

Ans. Yes, insurance premiums can increase over time. This can be due to factors like inflation, changes in your risk profile (e.g., age, health), or increasing medical care costs.

6. What is the role of insurance companies in the economy?

Ans. Insurance companies play a crucial role in the economy by:

• Providing financial security: They offer a safety net for individuals and businesses in case of unexpected events.
• Facilitating investment: Insurance companies invest a significant portion of the premiums they collect, contributing to economic growth.
• Risk mitigation: By pooling resources, they spread the risk of large losses, making it more manageable for businesses and individuals.

7. What is the purpose of insurance?

Ans. Insurance's primary purpose is to provide financial protection against various risks and uncertainties. It allows individuals and businesses to transfer the risk of potential losses or damages to the insurance company in exchange for a premium payment.

8. What are the tax benefits of insurance?

Ans. Many insurance products offer tax benefits to policyholders. For example, life insurance premiums and health insurance premiums can be claimed as deductions under the Income Tax Act in India. Certain insurance policies, such as endowment and unit-linked insurance plans, offer tax-advantaged investment opportunities.

9. How does insurance facilitate access to healthcare?

Ans. Health insurance is vital in providing access to quality healthcare. It covers the costs of medical treatments, hospitalizations, and other healthcare-related expenses, ensuring that individuals and families can receive the necessary medical care without facing significant financial constraints.

10. What are the benefits of having insurance coverage?

Ans. The key benefits of having insurance coverage include financial protection, risk management, access to healthcare, tax advantages, savings and investment opportunities, and business continuity. Insurance provides a safety net, allowing individuals and businesses to effectively manage their risks.