‘Insurance Policy’ I’m sure all of us have come across this word several times. We often get phone calls from insurance companies regarding policies for our life, health, vehicle, etc. But, why are insurance policies so famous? Why do we need insurance?
Insurance is a protection that you buy for yourself and your family to secure life, health, and assets. It is a legal agreement between the insurer (the insurance company) and the insured (you). The insurer guarantees you to pay for any losses occurring from the insured event/ incident.
The Indian insurance sector has historically witnessed growth between 12 and 15 percent over a five-to-six-year time horizon. The growth of the insurance industry has risen because of various factors such as the recent pandemic, formalization of the economy, digitization, disruption in payment, etc., and it is expected to grow by 5.2% every year by 2023.
Before we move ahead to know the different types of insurance, let us understand how insurance works.
How Does Insurance Work?
An insurance policy is a legal contract between the insurer and the person seeking insurance (insured). The policy contract is a document with details pertaining to the terms & conditions and circumstances. Based on the policy contract, the insurance company decides to pay out the insured amount to you or the nominees.
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Let’s see how it works:
First of all, the individual chooses a life insurance policy as per their requirement and suitability. After choosing the insurance, the insurer and the insured gets a legal contract for the insurance, called an insurance policy. This policy has all the details, conditions, and circumstances under which the insurance company will pay the insurance amount to the insured person or nominees.
As per the insurance policy the insured person needs to pay the regular premium on the given interval. In case of any unforeseen events the insured person or nominee can claim for the insurance.
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After the insurance is claimed the company will evaluate the claim application to make a decision to process it. During an insurance claim, the insurance company will assess the claim application and process only if it meets the contract terms and conditions. Hence, it is always advised to read the policy terms and conditions thoroughly.
Let’s understand how insurance works with an example.
Mr. Rahul takes a family medical insurance policy for himself and his family. The policy sum assured is ₹5,00,000. He pays a yearly premium of ₹17,000 towards the policy. Post the insurance, let’s say he had to undergo medical surgery and the estimated cost for the surgery and hospitalization is ₹4,50,000.
Since he has a medical insurance policy that covers costs up to ₹5,00,000. His surgery and hospital expenses are covered by the policy as per the terms and conditions of the policy. He will not have to worry about paying the surgery expenses from his savings.
Types of Insurance
There are different types of insurance policies that cover different contingencies. Therefore, you must carefully evaluate which type of insurance you need. Following are the different types of insurance:
Life Insurance
Life insurance is an insurance cover for your life. It provides financial security to one’s family/ dependents in case of one’s death. It is very important to have life insurance in case your family is highly dependent on your income. If the policyholder departs during the policy’s term, the policyholder’s family gets financial support.
Health Insurance
Health insurance is an insurance cover for your medical and hospital expenses. The health insurance will cover all the medical expenses as per the terms and conditions mentioned in the policy. Health insurance can be generic or specific (covering certain diseases).
Vehicle Insurance
Vehicle insurance is an insurance cover for your vehicle. The purpose of vehicle insurance is to cover an unforeseen event, such as road accidents. The insurance cover for the vehicle depends on the terms and conditions mentioned in the policy.
Home Insurance
Home insurance is an insurance cover for your house. It provides coverage to the policyholder from unforeseen loss or damage to the house structure as well as its content. For example, having insurance for your home will help you cover the costs of replacing or repairing it in the event of an accident or other natural disasters.
Home Loan Insurance
Home loan insurance is an insurance cover that settles the outstanding home loan amount in case of unforeseen events. Under some circumstances such as the policyholder’s untimely death, the insurer will settle the outstanding home loan amount with the bank or lender.
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Child Insurance
Child insurance or a child plan is an investment cum insurance plan for kids. The reason why people opt for child insurance policy schemes is to ensure that their child is protected in case of the untimely death of the parent proposing the policy. Therefore, you will be able to secure your child’s future, even during your absence.
Travel Insurance
Travel insurance is an insurance cover for your domestic and international travels. The main reason why people opt for travel insurance is to cover specific financial risks and losses that may take place during travel. The losses can be misplaced baggage, last-minute trip cancellations, or any medical emergencies during your travel.
When Do You Need Insurance?
Are you confused about whether you need insurance?
Well, it’s quite common to be stuck with such a dilemma. The answer to it is very simple. You just need to evaluate your financial position and start insuring your health, family, travels, and assets.
Instances when you may need insurance:
-When you are the sole earning member of the family.
-When you have dependents (parents, spouse, and children).
-Your debts and loans are not completely paid off.
-If you are going on an international trip.
-To cover your medical expenses.
-For your assets (home, vehicle, etc.) to cover for damages.
-For your child’s future.
When Should You Increase Your Insurance Cover?
Purchasing an insurance policy will not solve the purpose. You need to ensure that the policy cover is adequate and will meet your family’s requirements. Here are instances that demand you to increase your insurance cover:
Parents’ retirement: You need to take additional insurance when your parents retire, or their income reduces. They would require financial support from you, and hence, increasing your insurance cover is the best way forward.
Marriage: When you get married your responsibility increases as well as you look.
Kids: When you have kids, responsibilities will just keep increasing. Schooling, college, and marriage are some of the major costs that require your attention. Considering these factors, you should increase your insurance coverage accordingly.
Loan: When you have taken a loan, and in your absence, your family should be able to continue the loan EMI payments. Therefore, ensure you take enough cover for your loans as well.
Change in Occupation: During your employment, you often have an insurance policy provided by your employer. Such an insurance policy is a basic one. It often doesn’t give you full coverage. Thus, it is advisable to have an additional policy for yourself to avoid any kind of financial crunch during emergencies. Furthermore, if you quit your job and are exploring entrepreneurial opportunities or looking for another job, you might require a higher insurance cover.
By quitting your job, you will no longer be entitled to employee benefits or insurance benefits from the employer. Therefore, you will have to compensate by increasing your insurance policy cover.
Do Insurance Schemes Offer Any Tax Benefits?
In addition to the safety and security, an insurance policy offers, there are income tax benefits as well. You can declare your premium payments for tax benefits directly while submitting your Income Tax returns.
Section 80C: Life insurance premium payments up to ₹1,50,000 per annum are tax exempted under Section 80C of the Income Tax Act, 1961.
Section 80CCC: Amount paid towards any annuity plan for the purpose of getting a pension can be claimed as a tax deduction under Section 80CCC of the Income Tax Act, 1961. A maximum deduction of ₹1,50,000 can be claimed under this clause.
Section 10 (10D): The sum assured on maturity or surrender of a policy, or upon the policyholder’s death, is totally tax-free under Section 10(10D) of the Income Tax Act. Furthermore, any bonuses on the sum assured are also tax-free.
Section 80D: Medical insurance premiums up to ₹25,000 for yourself and your family, as well as ₹25,000 for your parents (₹50,000, if parents are senior citizens), are tax exempted under Section 80D of the Income Tax Act, 1961.
The next most important questions are, ‘Is my insurance cover sufficient?’ How much insurance do I need? Am I underinsured? Which policy is best for me? Stay tuned to understand how you can evaluate your insurance requirements and shortlist a policy for yourself.
