What Is Insurance

What Is Insurance

Insurance aims to mitigate the impact of unforeseen events, offering a safety net when life takes an unexpected and unfortunate turn.

Written by : Rishabh Jain

Reviewed by : Lalit Lata

Lalit Lata

2022-11-14

9003 Views

10 minutes read

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Insurance is a contractual agreement between an individual and an insurance company. The insurer agrees to provide financial coverage against specified risks in exchange for regular premium payments. Various types of insurance, from life and health insurance to property and casualty coverage, are tailored to address different needs and risks. 

Each type serves a unique purpose, safeguarding individuals, families, and businesses against potential losses. Insurance benefits extend beyond financial protection, providing reassurance and stability in times of crisis. Whether securing your loved ones’ future or safeguarding your assets, insurance promises resilience and security in an unpredictable world.

Table of Content

Insurance - Meaning and Definition

To answer the most common question, what is insurance? First, understand the literal meaning of insurance. It means an assurance against unforeseen and unfortunate loss. This means you can be compensated if you encounter an unfortunate event and incur a financial loss because of it.

For example, you were in an accident on your way to the office in your car, and the car suffered damage. Your insurer can reimburse the repair expenses in this case. However, the insurer will not reimburse for normal wear and tear, like a headlamp that stopped working.

Legally, insurance is a contract in which the insurer agrees to compensate the insured against losses incurred due to unforeseen contingencies. The contract also involves a consideration called a premium. The maximum available benefit amount is called the sum assured or sum insured.

What is Insurance Policy & How does it Work?

The insurance policy is a legal agreement between the policyholder and the insurer that specifies the claims that the insurer must pay under law. Under the terms of the policy, the insurer agrees to pay for losses resulting from risks covered in exchange for a payment known as the premium. To understand how insurance works, you should know below terms:

Insurance Components:

  • Premium: This is the financial consideration which makes the insurance agreement a legally binding contract.
  • Policy Limit: The policy limit applies to health and general insurance policies where compensation depends on the amount of loss. The policy may limit the maximum compensation for certain types of losses.
  • Deductible: Deductible applies to general insurance and health insurance policies. A deductible is the maximum loss you will bear out of your pocket. The insurer will start paying only when your losses (or expenses) exceed the deductible limit.

Here is How an Insurance Policy works: 
 

  • The insurance policy lists all the policy conditions and circumstances under which the insurance company is liable to pay you or the nominee the insurance amount.
  • When you buy an insurance policy from the insurance company, you will make regular payments (premium) for a specified period towards the insurance policy. 
  • The insurance company collects the premium from all the policyholders. They pool the money for losses arising from an insured event. 
  • You can claim benefits during the policy tenure. It depends on the policy type and the conditions.

Also Read - Different types of insurance policies

Insurance policies span a diverse spectrum, each tailored to meet specific needs and circumstances. Although classified into various categories, they share the common goal of offering a safety net in times of uncertainty, thereby promoting stability and resilience in personal and professional spheres.

Insurance contracts have been classified into two categories traditionally. These classifications are based on insurance principles:

Life InsuranceGeneral Insurance
Term Life InsuranceHealth Insurance (Mediclaim) plans
Endowment Life InsuranceVehicle Insurance
Moneyback PlansFleet Insurance
Savings PlansHome/Property Insurance
Child Education PlansFire & Hazards Insurance
Unit Linked Insurance Plans (ULIPs)Travel Insurance
 Liability Insurance
 Keyman Insurance

Types of Insurance Policies

You can divide the insurance based on the type of coverage it is providing as below: 

Life Insurance Policy

It is insurance on your life. You buy life insurance to ensure that your loved ones are financially secure even when you are not around. If you are the only breadwinner, you would want your family members to maintain the same living standards in the event of your untimely demise. The nominee gets the sum assured in case of your death.

Must Read - What is Life Insurance?

Health Insurance Policy

Although health insurance is usually counted as a general insurance contract, there are a few differences. Health insurance covers your medical costs for expensive treatments.

You can avail two types of health insurance policies:

  • Mediclaim Insurance, which compensates you for the medical expenses
  • Critical Health Insurance, which offers lump-sum payments for dangerous and life-threatening health conditions 

Non-life Insurance Policy

These compensate for the losses sustained arising from a specific financial event unrelated to life. Non-life insurance could be car insurance, home insurance, travel insurance etc. You can avail insurance benefits under the following two types of policies:

Individual InsuranceGroup Insurance

It caters to an individual and is customised as per one's needs and requirements.

The premium amount is decided based on your age, family medical history, health, etc.

These are insurance companies drawn in the group's name.

The premium amount is general and gets deducted from your salary.

The group cost is lower.

 

Because of these two variants, health insurance falls perfectly between general and life insurance policies. Also, both health insurance policies ensure complete financial safety for you and your family.

Did you know?

The origins of modern insurance can be found in the London Fire of 1666. Due to the severity of the fires, insurance became essential rather than optional.

Source: Investopedia

Claim Settlement Ratio

Key Features of Insurance 

Listed below are the key features of an insurance plan that you should consider:

  1. Insurance is a tool for risk transfer.
  2. Insurance is a community solution as several people who are exposed to the same risk pool their funds together to bear the loss.
  3. The contract is based on the ‘utmost good faith’ principle, unlike other business contracts.
  4. Insurance cover does not affect the chance of loss or minimise the magnitude of loss.
  5. As a party to the insurance contract, you should always try to avoid, mitigate and minimise the losses.
  6. You can only insure against risks which are unpredictable in occurrence and magnitude.
  7. Speculative, financial (betting) and business risks cannot be insured.

Benefits of Insurance 

There are a lot of benefits to buying insurance, and listed below are some of them:

  • Financial Safety for Family: - They provide cover against life's uncertainties and protect you against losses arising from different unexpected events in life.

  • Wealth Creation Goals: - Insurance policies like ULIPs give you investment opportunities and help you fulfil your essential financial goals.

  • Wealth Preservation: - Life insurance policies like endowment and money-back plans are some of the safest long-term investments possible. These plans help you preserve your wealth from inflation and taxes for long periods.

  • Wealth Distribution: - Few investment plans offer the kind of safety offered by life insurance pension plans. After retiring at the age of 60, you can live up to 100. Only life insurance pension plans can guarantee a regular income for that period.

Must-Have Life Insurance Policies

Insurance plays a vital role in our lives. It helps us financially in different stages of our lives. 

Listed below are different types of life insurance coverage that one should have:

  • Term Insurance Plan:- This is the purest form of life insurance wherein you pay a premium towards the policy, and in case of your death during the policy tenure, the nominee receives the sum assured. With term insurance, you can receive high coverage against a lower premium. iSelect Smart360 Term Plan  by Canara HSBC Life Insurance offers critical illness coverage against 40 listed illnesses.
  • Retirement Plan:- A retirement plan is a type of life insurance that focuses on ensuring your financial stability and security after retirement. Investing in retirement plans might help you establish a consistent income stream. If you continue to invest until retirement, the plan will help you cover your retirement needs. Retirement plans also include death benefits. If the policyholder dies within the insurance term, their beneficiaries will get an assured sum.
  • Child Plans:- A child insurance plan is an investment savings plan that offers financial security for the child's future in the event of the policyholder's unexpected passing. It is perfect for making sure the child's future needs are met even if the life insured doesn't. You can buy the best child insurance plans to satisfy your child's financial needs for college or marriage or to accomplish a host of other financial objectives.

Tax Benefits of Insurance 

Along with providing financial security, insurance also offers tax benefits. Here are some of the tax benefits offered by insurance:

You can claim a life insurance premium of up to Rs 1.5 lakh under Section 80C.

Under Section 80D, you can claim a medical insurance premium of up to Rs 25,000 for yourself and your family and an additional Rs 25,000 for your parents. The deduction limit rises to Rs 50,000 if the insured are senior citizens. Under Section 10(10D), the life insurance benefits you or the nominee receives from the insurance company are tax-exempted. This means both maturity value and death benefit received from a life insurance policy will be tax-free. However, the maturity benefit is tax-free only if your annual premium for the policy does not exceed 10% of the base life cover in the policy.  

Summing Up

Insurance is a financial arrangement that protects against the risk of loss or damage to assets, health, or life. It operates on the principle of pooling risks among a large group of individuals or entities who pay premiums into a common fund. In return, the insurer promises to compensate for covered losses or liabilities. Insurance benefits are manifold: they offer security by mitigating financial risks, providing financial security to individuals and businesses, helping manage uncertainties, and facilitating recovery from unexpected events. Additionally, insurance is crucial in promoting economic stability by spreading risks across society and encouraging investments and entrepreneurship while managing risks and safeguarding against unforeseen circumstances.

Glossary

  • Sum Insured: Sum insured is the maximum cap on the costs you are covered for in a year against any unfortunate event. It is applicable to non-life insurance policies like home and health insurance. 
  • Sum Assured: Sum assured is the amount the life insurance company pays to the nominee if the insured event happens (death of insured). This term is used in life insurance policies.
  • Maturity Value: The amount of money paid out when a life insurance policy matures is known as its maturity value.
  • Risk Transfer: Risk transfer is a strategic method where a pure risk can be contractually shifted from one party to another as part of risk management and control.
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Life Insurance - Top Selling Plans

We bring you a collection of popular Canara HSBC life insurance plans. Forget the dusty brochures and endless offline visits! Dive into the features of our top-selling online insurance plans and buy the one that meets your goals and requirements. You and your wallet will be thankful in the future as we brighten up your financial future with these plans.

Family Shield: Enhanced Protection

iSelect Smart360 Term Plan
  • 3 Plan options
  • Life cover till 99 years
  • Steady income benefit
  • Block your premium at inception

Start Young, Pay Less, Stay Secured

Young Term Plan
  • Life cover till 99 years
  • Coverage for spouse
  • Block your premium rate
  • Covers 40 critical illness

Fixed Returns, Zero Risks & Worries

iSelect Guaranteed Future Plus
  • 4 Plan options
  • Life cover + Guaranteed benefits
  • Accidental death benefit
  • Premium protection cover

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FAQs Related to Insurance Policy

Insurance plans are helpful for those who want to shield their loved ones, possessions, and self from monetary danger or losses. These plans can cover unexpected medical expenses, hospital stays, the onset of illnesses and their treatment, as well as future medical needs.

Life insurance is crucial for anyone who wants to provide financial protection for their loved ones in case of their unexpected demise. It's particularly important for those with dependents, such as spouses, children, or ageing parents, who rely on their income for financial support. Additionally, individuals with outstanding debts, such as mortgages or student loans, may benefit from life insurance to ensure those debts are covered in the event of their death.

The term "waiting period" refers to the amount of time you must wait before receiving insurance benefits in health insurance programmes. The insured cannot make any claims for health insurance benefits during this period, which starts on the date the policy is initiated.

The goal of insurance is essentially defeated by non-renewal. An insurance policy's primary goal is to give your family security in your absence. But if you don't renew your policy when it matures, it lapses, and your family loses the protection you have been paying for all this time. 

The amount of money paid by an individual, organisation, or corporation to get insurance coverage is known as the insurance premium.  It is the cost of receiving protection from a loss, danger, or injury.

The risk associated with life insurance is the potential financial loss to your family in the event of your untimely death. The risk that a life insurance company is attempting to insure is your death.

An insurance policy is essentially a contract between you and an insurance company. You agree to pay them a certain amount of money (called a premium) regularly, and in return, they promise to provide financial protection against certain risks. If something unfortunate happens to you (accident, illness, or damage to your property), the insurance company will help cover the costs according to the terms outlined in the policy.