Glimpse on the Benefits of Insurance Policy

Insurance is the most effective risk management tool that can protect individuals and businesses from financial risks arising from various unforeseen events. Emotional and psychological loss can never be replaced, but at least financial loss can be replaced with insurance. Although there are uncertainties in life that you cannot mitigate, insurance will certainly help you transfer the financial risk associated with it. Let us have a look at the benefits of the insurance policy.

Insurance- Definition and Meaning

Insurance coverage can be defined as a contract in the form of a financial protection agreement. This policy covers an individual’s monetary risks due to unforeseeable unforeseen events. The insured is the policyholder, the insurer is the insurance company/insurance carrier/underwriter. In many cases, insurers provide financial cover or compensation to the policyholder.

The policyholder pays a certain amount called a “premium” to the insurance company against which the insurance company provides insurance coverage. The insurer assures that it will cover the policyholder’s losses under certain conditions. The payment of the premium determines the sum insured for the insurance coverage or “policy limit”.

Types of insurance available

Various types of insurance products are available in India. Insurance products are mainly divided into:

• Life insurance products
• General insurance products

Life insurance is a type of insurance that covers you against the risk of death. Life insurance policies come in many variants such as term plans, endowment plans, life insurance plans, cash-back plans, investment plans linked to a mutual fund, etc. Many life insurance products can be a great tool for long-term savings as well as a combination of protection and savings. General insurance products cover financial losses caused by various perils other than death. General insurance products are available in various types that cover a wide range of risks such as health insurance, motor insurance, marine insurance, liability insurance, travel insurance, commercial insurance, etc.

Insurance is an effective risk management tool that protects what is valuable to us– life, health, home, businesses, etc. Insurance requirements may vary from individual to individual but there are certain types of insurance products that are must-haves for every individual to ensure a secure future.

Components of Insurance

• The Insurance Premium Policy: A premium is an amount you have to pay to buy a specific amount of insurance coverage. They are usually expressed as recurring costs, whether monthly, quarterly, semi-annually or annually, that you incur during the premium payment period.
  There are several factors based on which the insurance company calculates the premium for the insurance policy. The basic idea is to check the eligibility of the insured individual for the particular type of insurance he wants to buy. For example, if you’re healthy and don’t have a history of serious medical conditions, you’re likely to pay less for health or life insurance than someone with multiple illnesses.
  You should also know that different insurance companies may charge different premiums for similar types of policies. Choosing the right one at an affordable price takes some effort.

• Policy limit: It is defined as the maximum amount that the insurance company is obliged to pay for losses covered by the insurance contract. It is determined based on the period (policy period), loss or injury, and similar other factors.
  In life insurance, the maximum amount that the insurer will pay to the named person is known as the sum assured.

• Deductible: A deductible related to an insurance policy is an amount or percentage that the policyholder agrees to pay out of pocket before the insurer begins to settle the claim. You can also think of it as a deterrent to the small, insignificant claims that many people record on their insurance policies.
  The excess applies to the insurance policy or the insured event as defined in the terms of the specific type of insurance policy. In general, policies purchased with high deductibles are cheaper because higher out-of-pocket expenses result in fewer claims.

How does insurance work?

The concept is based on “risk pooling”. When you purchase any type of term policy with a specific cover from an insurance company, you will make regular payments (referred to as premiums) on the policy. Similarly, the Insurance Company collects premiums from all its clients and collects the collected money to cover damages incurred as a result of an insured event. If an insured event occurs and you claim the insured event, the losses will be covered by the insurance company from the policyholder’s pool. In case you do not claim within the stipulated policy period, no benefits will be paid to you. However, these days’ insurance companies offer different types of products that also include a savings element.

List of benefits and importance of insurance

Insurance is a risk management tool not only beneficial to individuals and businesses, but also to society and the economy in many ways. The important benefits of insurance are listed as follows:

• Provides peace of mind: Insurance acts as a protection against various uncertainties that can put you or your family in a financial crisis. By covering the uncertainties of human life and business, insurance provides a sense of security. Life insurance assures you that your family’s financial stability will remain intact even when you are not around. Health insurance gives you the sense of security that you don’t have to spend all your savings in the event of a medical emergency.

• Supports risk control: As insurance works on the mechanism of risk transfer, it supports the activity of risk control.

• Promotes economic growth: The insurance funds are invested in various projects like water supply, power, roads, etc., which contribute to the overall economic growth of the country. Insurance also provides employment opportunities for people. Insurance contributes to economic growth in many other ways such as attracting foreign direct investment, paying taxes on the profit earned, and investing in the capital market, etc.

• Distribution of risk: Insurance risk is spread among different individuals and organizations instead of being concentrated in just one.

• It helps to get a loan easily: There are loan instruments offered against insurance policies. In the case of home loans, insurance can help you easily get a loan from a lender.

• Cultivates the habit of saving: Many life insurance products come with investment protection benefits. Such products inculcate regular savings among individuals. Plans like endowment plans help in achieving long-term financial goals. Additional pension insurance helps ensure a regular income in old age.

• Provides tax benefits: The insured gets tax benefits for the premium paid depending on the type of insurance product. For example, premiums paid on life insurance plans are eligible for tax deduction under Section 80C of the Income Tax Act. And premiums paid on health insurance plans are eligible for tax deduction under Section 80D of the Income Tax Act.

• Investment opportunities: An investment insurance plan invests part of the premium in several market-linked funds. In this way, they allow you to regularly invest money for market-linked returns and fulfill your life goals.

Final words

Insurance is a necessity in our time. While many invest in different types of insurance, not everyone is aware of the many benefits it offers. Insurance, like life insurance, secures not only your financial future but also your family, safely and cheaply. In addition, investing in life insurance encourages a regular habit of saving money. So it allows you to create a significant corpus.