Insurance: Importance, Types and Benefits

A person's life and property are surrounded by the risk of death, disability or destruction. These risks can result in financial loss. Insurance is a prudent way of transferring such risks to an insurance company.

What is insurance?

Insurance is a legal agreement between two parties i.e. insurance company (insurer) and individual (insured). In this, the insurance company promises to compensate the loss of the insured in the event of an accidental event. A contingency is an event that causes a loss. This could be the death of the policyholder or damage/destruction of property. It is called contingency because there is uncertainty about the occurrence of the event. The insured pays a premium in exchange for a promise made by the insurer.

How does insurance work?

The insurer and the insured enter into a legal contract for insurance, which is called an insurance policy. An insurance policy details the terms and conditions under which the insurance company will pay the sum assured to the insured or nominee. Insurance is a way of protecting yourself and your family from financial loss. Generally, the premium for larger insurance cover is very less in terms of money paid. The insurance company takes the risk of providing high cover for low premiums as very few insured people actually claim the insurance. This is the reason why you get a large amount of insurance at a low cost. Any person or company can take insurance from an insurance company, but the decision to provide insurance is at the discretion of the insurance company. The insurance company will evaluate the claim application to take a decision. Generally insurance companies refuse to give insurance to high risk applicants.


What types of insurance are available in India?

Insurance in India can be broadly divided into three categories:


Insurance

As the name suggests, life insurance is insurance for your life. You buy life insurance to ensure that your dependents are financially secure in the event of your untimely demise. Life insurance is especially important if you are the sole breadwinner for your family or if your family is heavily dependent on your income. Under life insurance, financial compensation is given to the family of the policyholder in case of death of the policyholder during the policy term.


Health insurance

Health insurance is bought to cover the medical cost of expensive treatments. Different types of health insurance policies cover different types of diseases and ailments. You can buy general health insurance policies as well as policies for specific diseases. The premium paid for a health insurance policy usually covers the cost of treatment, hospitalization and medicine.


Car insurance

In today's world, car insurance is an important policy for every car owner. This insurance protects you from any untoward incident like an accident. Some policies also cover damages caused to your car during natural calamities like flood or earthquake. It also covers third party liability where you have to pay for damages caused to other vehicle owners.


Education insurance

Child education insurance is similar to a life insurance policy specially designed as a savings tool. Education insurance can be a great way to provide a lump sum amount when your child reaches the age of pursuing higher education and gains admission to college (18 years and above). This fund can be used to pay for the higher education expenses of your child. Under this insurance, the child is the insured or the money payer while the parent/legal guardian is the owner of the policy. You can estimate how much money it will take for your child's higher education by using the education plan calculator.


Home insurance

We all dream of having our own house. Home insurance can help cover loss or damage to your home caused by accidents like fire and other natural calamities or perils. Home insurance also covers other incidents like lightning, earthquake etc.


What are the tax benefits on insurance?

Apart from the security benefits of buying insurance, there are also income tax benefits that you can avail.


  • Tax-saving deduction can be claimed under Section 80C on life insurance premiums up to ₹1.5 lakh
  • Medical insurance premium up to ₹25,000 for you and your family and up to ₹25,000 for your parents can be claimed as a tax-saving deduction under Section 80D.

These claims have to be made at the time of e-filing of income tax return.


Conclusion

Be it life insurance, health insurance or general insurance, you can buy insurance policies offline as well as online. Just like there are insurance agents who will help you buy the policy, there are also websites from where you can buy the policy. Make sure you do your research before choosing and investing in an insurance policy.

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