What is insurance?
Insurance is a tool which compensates the financial loss suffered. It is a tool of risk management wherein you transfer your risks to the insurance company and if such risks occur, the company compensates you for the loss suffered.
How does insurance work?
Insurance works on the principles of pooling of risks and the probability of a loss. Individuals who face similar risks pool their risks together by buying insurance. They pay premiums for the policy which is pooled together. Thereafter, those policyholders who actually suffer a loss are compensated from the premium pool. Since the probability of loss is applicable for a few individuals, they can get compensated by the collective pool.
Why is insurance needed?
Insurance is needed simply for one reason – financial security. You cannot predict whether you would suffer a loss or not. However, you can prepare against the loss if it does occur. When you have insurance you have the financial security that if you suffer an uncertainty, you would not suffer any financial loss. Besides financial security, life and health insurance plans also give you tax benefits making them beneficial products.
Important aspects of insurance
Before buying a suitable insurance policy, you should know some of the important aspects of insurance which is common to all plans. These aspects are as follows –
Types of insurance plans
Insurance policies are broadly categorized into two different types – life insurance and general insurance.
Life insurance plans are those which cover the risk of premature death or living too long. Individuals buy a life insurance policy for a specific tenure and if they die during the tenure, the policy pays a death benefit. Moreover, there are plans which also pay a benefit if the individual survives till the end of the policy tenure.
General insurance plans, on the other hand, cover a variety of risks except the life of an individual.
Life and general insurance plans are further sub-divided into different types of policies. While life insurance plans have different policies for different financial needs, general insurance plans have different plans for covering different types of risks.
Have a look –
Types of life insurance plans in India
As you can see from the above chart, life insurance policies come in different variants. Here is a quick look at these variants –
|Type of life insurance plan||Brief description|
|Term insurance plan||Covers the risk of premature death and provides financial security|
|Whole life plans||Run up to 99 or 100 years of age and cover the risk of death during the tenure|
|Endowment plans||Savings oriented life insurance plans which pay either a guaranteed death benefit or maturity benefit|
|Money back plans||A variant of endowment insurance plans but where the sum assured is paid in installments during the policy tenure in the form of money backs|
|Child plans||Insurance plans specifically designed to create a corpus for the child’s future even when the parent is not around|
|ULIPs||Market linked insurance plans which provide the benefit of insurance as well as investment returns|
|Pension plans||Retirement oriented life insurance plans which help you create a retirement corpus and also receive lifelong pensions|
How to choose the best life insurance policy?
Since there are different types of life insurance plans, you should be careful in selecting the most suitable policy which fulfils your financial needs. Here are, therefore, some points which you should keep in mind when buying life insurance so that you can get the best policy –
- The sum assured of the plan should be optimal enough to cover the family’s financial needs
- The policy should match your financial goal
- A long term policy should be taken for longer coverage
- The premiums should be affordable
- The insurance company should be reputed
Read a complete guide on how to plan your family’s financial future.
While there are different types of general insurance policies, a health insurance plan is an absolute must. The policy covers the medical costs incurred in a medical emergency and thus provides financial relief.
Types of health insurance plans
Like life insurance plans, health insurance plans also come in different variants to fulfil the coverage needs of different individuals. These variants are as follows –
|Type of health insurance plan||Brief description|
|Comprehensive health insurance plans||These plans cover a range of medical costs and provide financial assistance in a medical emergency|
|Senior citizen health insurance plans||These are health plans designed for individuals aged 60 years and above|
|Disease specific health plans||These are health plans which cover specific diseases or the patients suffering from such diseases|
|Top-up and super top-up plans||Supplemental health insurance plans which can be used to enhance an existing coverage at affordable premiums|
|Critical illness health plans||These health plans cover a list of critical illnesses and pay the sum insured in lump sum if you suffer from any covered illness|
|Hospital cash plans||These plans cover hospitalization for at least 24 hours. In such cases, a fixed daily benefit is paid|
Insurance and tax benefits
As mentioned earlier, life and health insurance plans offer you tax benefits. Let’s have a look at these benefits –
|Income tax Sections||Tax benefit|
|Section 80C||Premium paid to buy a life insurance policy is allowed as a deduction up to Rs.1.5 lakhs|
|Section 80CCC||Premium paid to buy a pension plan is allowed as a deduction up to Rs.1.5 lakhs which includes deductions under Section 80C|
|Section 80D||Premium paid to buy a health insurance policy is allowed as a deduction up to Rs.1 lakh|
|Section 10 (10D)||Maturity benefit received from a life insurance policy is tax-free in your hands|
|Section 10 (10A)||Commutation of pension from a pension plan is allowed as a tax-free benefit in your hands|
Insurance is an important protection tool which you should have in your portfolio for financial security. Choose the suitable insurance plans depending on the risks you face and create your very own protection portfolio. For a detailed insight into insurance and its plans, you can take this course and get complete knowledge about insurance and its different aspects of financial planning.