What is Insurance?

Insurance is one of the most critical services of our time. There are risks all around us, be it the risk of fire, accidents, illnesses, liabilities, and more. Having an insurance policy during tough times can mean the difference between smooth sailing and a rough ride.

This article will discuss the following important topics on insurance:

What is Insurance?
Benefits of Insurance
Types of Insurance
How does Insurance Work?
Insurance Examples
Principles of Insurance

What is Insurance?

An insurance policy is a contract of indemnity between the insured (policyholder) and the insurance company. The insurance company indemnifies the insured in exchange for a fee. This fee is called an insurance premium. In simple words, the insurance company will protect the insured against a specified set of risks and uncertainties, as mentioned under the policy bond.

Benefits of Insurance: Due to the following mentioned benefits of insurance, it would be a prudent decision for a person to consider purchasing an insurance policy.
Peace of Mind: A person will have peace of mind if he is indemnified against certain uncertainties and risks. This peace of mind will in turn lead to his better health and wellbeing.
Tax Benefit: Life insurance premiums qualify for deductions under Section 80C of The Income Tax Act. Whereas Health insurance premiums qualify for deductions under Section 80D of the Indian I.T Act.
Financial Support: Having an insurance policy can act as a cushion against heavy unforeseen expenses such as medical expenses, third-party liabilities, etc.
Death/Maturity Benefit: A life insurance policy can provide death or maturity benefit to the policyholder or to his nominee. This value can then be used towards whatever cause they feel justified.

Types of Insurance

There are various types of insurance policies offered in the market. Every insurance contract is designed to cover a specific set of risks. Let us look at some popular types of insurance:

Whole Life Insurance: A whole life insurance contract covers the insured against death and disability. If a person having a life insurance policy passes away, his nominee will be eligible to receive a sum assured as compensation.
Term Insurance: A term insurance policy is similar to a whole life insurance policy. The only difference is that the coverage will only be for a predetermined term. For instance, a whole life insurance policy will provide coverage to the insured for his whole life, but a term insurance policy may provide coverage for only 30 years.
Motor Insurance: It is mandatory under The Motor Vehicles Act 1988 that every driver has a valid third-party motor insurance policy. No one can drive on Indian roads without a motor insurance policy. Motor insurance comes in two primary variants, comprehensive motor insurance, and third-party motor insurance. Let us understand the difference between the two.
- Comprehensive Motor Insurance: A comprehensive motor insurance policy provides protection against owner damage, vehicle damage, and liabilities arising out of third party accidents.
- Third-party Motor Insurance: A third-party motor insurance policy only covers liabilities arising out of third-party accidents. Only the third party is covered under this type of insurance plan.

Health Insurance:

Health insurance is one of the most important types of insurance services available in the Indian market. A health insurance policy protects against unexpected accidents and illnesses.
There are a variety of different health plans available in India, they are:

Individual health plan
Family floater plan
Unit linked health plan
Mediclaim
Group mediclaim
Daily cash plan
Accident cover plan
Critical illness plan

Other Types of Insurance:

There are a host of other lesser-known insurance services also available in the Indian market. They are:

Marine insurance
Liabilities insurance
Engineering insurance
Mobile phone insurance
Loan insurance
Home insurance
Fire insurance
Travel insurance
Agriculture insurance

How does Insurance Work?

Let us understand how the concept of insurance works in simple steps:

Step 1: A Person finalizes an insurance policy based on his needs.
Step 2: The person purchases the policy by paying his first insurance premium.
Step 3: The insurance contract gets initiated and is now active.
Step 4: The policyholder can decide to make a claim if need be.
Step 5: Upon claim, the insurance company will reimburse the policyholder for the damages that have occurred.

Insurance Examples

Let us solidify the concept of insurance with 3 simple examples.

Life Insurance Example

Let us assume that Mr. Mohan bought a Rs 50 Lakh worth life insurance policy from HDFC Life. He, unfortunately, passed away five years after purchasing the policy. As per the policy terms, HDFC Life will now pay Rs 50 Lakhs to Mr. Mohan’s nominee.

Health Insurance Example

Let us assume that Mrs. Devika bought a Rs 30 Lakh worth health insurance policy from HDFC ERGO. She, unfortunately, met with an accident soon after she bought the policy, and is now admitted to the hospital. As she was insured, the insurance company will bear the total expenses of her treatment.

Motor Insurance Example

Let us assume that Mrs. Sridevi bought a motor insurance policy from ICICI Lombard. Soon after, she met with a minor road accident and damaged her car’s windscreen. She now makes a claim with the insurance company for her damages. As she was insured, the company will bear the repair expenses of her automobile.

Principles of Insurance

The concept of insurance is governed by 7 principles. These principles govern the functioning of insurance. They are:

Principle of insurable interest
Principle of indemnity
Principle of contribution
Principle of subrogation
Principle of proximate cause
Principle of utmost good faith
Principle of loss minimization

It is very important for parties to an insurance contract to abide by these principles. If either the insurer or the insured violates any of the above 7 principles, the contract of insurance can be terminated.