What is Insurance? Meaning & Benefits of Insurance

Written by : Daina Mathew

Reviewed by : Jasmeet Bedi

Jasmeet Bedi

2024-09-27

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There are uncertainties in life, and even though you cannot mitigate them, you can prepare for them. You are working hard to secure the future of your loved ones. However, in case of your sudden death, all the dreams will remain unfulfilled if you have not planned for them.

The family goes through psychological and emotional losses that cannot be compensated. However, a life insurance policy can compensate for the financial losses to some extent.

Definition of Insurance

There are many kinds of risks involved in life. In simple language, insurance is a risk transfer mechanism. You buy insurance to transfer risk to the insurance company and get the cover for the financial loss you may face due to unexpected events. It is a safety cushion that protects you and your family against contingencies.

Insurance is a legal contract between you (insured), and the insurance company (insurer) wherein the insurer promises to compensate for financial losses because of unfortunate events like an accident, damage to a house, or untimely demise of the insured.

How does an Insurance Policy Work?

To understand how insurance works, you should know below terms:

Premium: is the money you pay to the insurance company to avail of insurance policy benefits.
Sum Insured: Sum insured is applicable for a non-life insurance policy like home and health insurance. It refers to the maximum cap on the costs you are covered for in a year against any unfortunate event.
Sum Assured: Sum assured is the amount the life insurance company pays to the nominee if the insured event happens (death of insured).

As discussed above, insurance is a legal contract between the insurer and the insured. The insurance policy lists all the policy's 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 have to make regular payments (premium) for a specified period towards the insurance policy.

The insurance company collects the premium from all the clients. They pool the money for losses that may arise out of an insured event. If you don't claim during the policy tenure, you may or may not receive any benefits. It depends on the policy type and the conditions.

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 secured 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.

Health Insurance Policy

Health insurance covers your medical costs for expensive treatments. Different health insurance policies cover different types of diseases and ailments. The premium you pay towards the health insurance policy covers the treatment, medication, and hospitalization costs.

Learn whether you should opt for a long-term or short-term health insurance policy.

Non-life Insurance Policy

These compensate you for the losses sustained arising from a specific financial event that is not related to life. Non-life insurance could be car insurance, home insurance, etc.

You can avail insurance benefits under the following two types of policies:

Individual Insurance	Group Insurance
It caters to an individual and is customized as per one's needs and requirements.	These are insurance companies drawn in the group's name.
The premium amount is decided based on your age, family medical history, health, etc.	The premium amount is general and gets deducted from your salary.
The premium amount is decided based on your age, family medical history, health, etc.	The group cost is lower.

Click here to read - Different types of insurance

Why should you Buy an Insurance Plan?

You must have insurance for the below reasons:

Financial Safety for Family: They provide cover against life's uncertainties and protect you against losses arising from different unexpected events in life.
Safety of Financial Status: Certain events like medical emergencies can have a significant impact on your cash flow management. Insurance ensures you don't have to pay out of pocket for such situations.
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 moneyback 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.

Two Life Insurance Policies you Must Have

You must know the importance of insurance in your life, and once you understand it, you must have below insurance policies:

1. 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 cover against 40 listed illnesses.

2. Health Insurance Plan:

Knowing the rising cost of healthcare and the number of diseases you can have, it is wise to have a financial cushion against health contingencies.

3. Motor Insurance:

These are mandatory legal requirements in India, and you must have them if you own a two-wheeler or a four-wheeler. It is compulsory to avail of third-party liability motor insurance. However, you can have a comprehensive package to get covered against the various risks of damage with the personal accidental cover.

4. Home Insurance:

Your home is exposed to various kinds of risk like theft, damage due to natural calamity, etc. Hence to protect your home against such damages, you must avail of home insurance.

Such insurance plans will help you stay afloat even after a costly mishap or calamity.

Does an Insurance Policy Offer Tax Benefits?

Insurance gives your safety and security benefits and also income tax benefits. The benefits are as follows:

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 self and family and additional Rs 25,000 for 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.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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