Insurance in simple words, can be termed as a protection against the risk of potential loss in the future. It does not remove or eliminate the risk but enables one to recover the financial losses arising out of occurrence of undesirable events. Insurance is a way of getting away from stress and uncertainties such as untimely death, loss of property, health issues etc.
There are basically two types of Insurance – one which pertain to life and other pertaining to things other than life. Thus, the types are Life Insurance and General Insurance. General Insurance can be for various things, such as for motor vehicles, medical treatments, theft and burglary protection etc. All types of insurance are aimed to provide protection against specified risk, against a pre-determined consideration, that is premium.
Insurance is very essential especially since one is never certain about what life has in store for them. Initially, while insurance was mainly taken for the life of the policy holder, today, there are many variants and one can insure almost anything, against almost any contingency.
Some of the popular types of insurance are as follows:
1) Life Insurance: The insurance companies pay in case of death of the policy holder or at the time of maturity of the policy. There are various sub types of life insurance like endowment policy which has a specified maturity period and whole life insurance for lifelong protection. On the other hand, we have term insurance which is the true and the purest form of insurance and offers coverage only for a specified period of time. In case of death of the insured during the policy term, his / her nominee gets the entire amount of sum assured. However, if the insured survives the term of the plan then he / she does not receive any amount from the insurance company.
2) Health Insurance: As the name suggests, this type of insurance provides a cover for various illness or disability that may affect one. Various companies offer various policies which provide protection against different set of illnesses and disabilities. Therefore, one needs to be careful about choosing an appropriate type of policy. For example, generally, dental issues are not covered in standard health policies.
Hence, someone who needs to have this cover, needs to purchase a different product or buy cover after paying additional premium.
3) Auto Insurance: Auto insurance protects the policy holder against financial loss in the event of an incident involving a vehicle.
4) Property Insurance: This insurance helps you to prevent the losses against theft, fire, burglary or any natural calamity like earthquake, floods etc.
5) Travel Insurance: Travel insurance is highly desirable while travelling, especially overseas as it covers loss of personal belongings while travelling, medical expenses incurred abroad etc.
6) Credit Insurance: This insurance benefits the policy holder by paying the loans of the policy holder in case of any accident of the policy holder or job loss or death.
A) LIFE INSURANCE
Life Insurance, as we understand it today, was introduced in India by the British in 1818. Oriental Life Insurance Company, in Calcutta, was the first life insurance company established on Indian soil; though it expressly insured only the Europeans. Due to efforts of eminent people like Shri Babu Muttylal Seal, the foreign life insurance companies started insuring Indian lives; albeit at heavy premiums.
On 19th January, 1956, Life Insurance in India was nationalized with 154 Indian insurance companies, 16 non-Indian companies and 75 provident funds. Nationalization was a two-step process; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too by means of a comprehensive bill.
Life Insurance Corporation (LIC) of India was established in September 1956. It enjoyed monopoly till the late ‘90s until the Insurance sector was reopened for the private sector.
B) GENERAL INSURANCE
The history of general insurance dates back to the Industrial Revolution in the west during 17th century. General Insurance in India has its roots in the establishment of Triton Insurance Company Limited at Calcutta in 1850. In 1907, the Indian Mercantile Insurance Limited was established and was the first company to transact all classes of general insurance business.
General Insurance business was nationalized in 1972. A total of 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Limited, The New India Assurance Company Limited, The Oriental Insurance Company Limited and The United India Insurance Company Limited.
Following the recommendations of Malhotra Committee, Insurance Regulatory and Development Authority Act, 1999 was passed by the Parliament which gave birth to a regulatory authority for insurance sector, namely Insurance Regulatory and Development Authority of India (IRDA - www.irdai.gov.in). Since then, IRDA has framed various regulations for carrying on insurance business (life and general both) and to ensure protection of policyholders’ interests. Each insurance company needs to register itself with IRDA in order to conduct business in India. Further, any type of policy can be offered by any insurance company only after receiving necessary approval and ‘Unique Identification Number (UIN)’ from IRDA.
Today, India has one of the youngest populations in the world. With this high share of working population, rapid urbanization and rising affluence, the life insurance and the non-life insurance sector is witnessing fast growth. At present, there are total 57 insurance companies registered with IRDA, offering various types of life and general insurance products.
C) Ideal Insurance Cover for any Individual:
Most of us are uncomfortable around the subject of death. Consequently, it becomes tough to take a rational decision about the ideal amount of insurance cover required. It is very important to evaluate your Insurance needs to arrive at required types of insurance and amounts thereof. When deciding on a life insurance policy, following factors may be taken into consideration:
a) Debt: Your insurance must be able to cover all of your debts, including car loans, mortgages, credit cards, personal loans, etc. For instance, if you have a mortgage of ` 50 lakh, a car loan of ` 10 lakh and a personal loan of ` 5 lakh, then you need at least ` 65 lakh in your policy to cover your debts. The actual requirement would be a little more than ` 65 lakh to take care of the interest portion as well.
b) Your future obligations: With the rising cost and ever increasing needs, living has become expensive. There are a lot of things to consider for a smooth functioning of life. Your children’s education expenses, the lifestyle you want to maintain, yearly vacations you want to enjoy etc., will be a heavy burden once you stop earning. You can estimate these costs and add them to the amount of coverage you want. Once you determine the required face value of your insurance policy, you can start shopping around for the right policy.
c) Insuring the right people: There will be several important people in your life and you may want to insure every one of them. As a rule, however, you should only insure people whose death will create a financial void for you. For instance, the death of a child is emotionally unnerving but it is not a financial loss. On the other hand, if one loses an income-earning spouse, it results in an emotional as well as financial loss.
d) Claim settlement ratio: The claims settlement ratio is the proportion of death claims which have been settled by the insurance company from amongst the total claims received by the insurance company. This ratio provides a fair idea whether the insurance company can be trusted as a good option for insurance cover. Lowest premium should not be the only criteria.
e) Insurance and Age: Insurance is cheaper when you are young. One of the biggest myths is that insurance is harder to qualify for as you age, so get going while you are young. When you are young, your premium will be relatively cheaper. But get insurance only if you need it and when you need it. Do not get insurance just because you feel you are losing out on cheap premiums in your young age.
D) Other Insurance covers
Other types of Insurance like Auto or Property Insurance will necessitate the need to look at additional factors like liability for body injury, personal injury protection and liability for property damage. In case of Health Insurance, the cost of medical treatment needs to be taken into account for deciding the cover. A health cover of at least `7 – 10 lakh is recommended to be on the safer side for an average family.
Policy covering all family members are relatively cheaper than purchasing separate policies for each member. One should also consider the medical insurance provided by his / her employer and its coverage, before deciding to buy additional policy.
E) The Bottom Line
Insurance should be considered on the basis of your needs. Always buy insurance policy from an agent who is registered with the IRDA.
There are various online platforms which can help you compare different products and simplify the process to buy one. Generally, buying a policy online may be little cheaper than buying through an agent. However, you should do so only if you are able to understand the product and its suitability to your needs properly on your own.
F) Benefits of Insurance:
Insurance is important for an individual as it negates some of the risk associated with the uncertainties of life. At the same time, it is also beneficial for the growth of the economy. Below are some of the major advantages of insurance:
a) Provides safety and security: Insurance provides financial support and reduces uncertainties in business and human life. It provides security against particular events and a cover against any sudden loss. For example, in case of life insurance, an assured amount is paid by the insurance company to claimant in case of death of the insured person.
b) It encourages savings: In order to keep the insurance policy active (i.e. in-force), one needs to pay the premium amount regularly. Indirectly, this develops a habit of saving.
c) Medical support: Anyone can be a victim of unfortunate accident or sudden illness and with it comes the sudden medical expense. Over the period, cost of medical treatment has been increasing. Medical or Health Insurance is one of the insurance which provides financial support in case of specified illness or accident.
d) Basis of credit: An insured person can easily get a loan by pledging his/her insurance policy as a security from the insurance company itself.
Besides, many other financial institutions grant credit facilities on the pledge of properties which have been insured.
e) Tax benefits: The tax benefits offered by investing in insurance are, at best, incidental in nature and should not serve as a basis for obtaining insurance cover. The benefits available to individuals under sections 80C and 80D of Income Tax Act, 1961 (as on day) are:
Section 80C: The maximum amount of premium paid that can be exempted from taxation under Section 80C is ` 1,50,000.
Section 80D: The maximum amount of premium paid that can be exempted from taxation under Section 80D -
For self, spouse, and dependent children: Up to ` 25,000
For parents: An additional ` 25,000
For parents who are senior citizens: ` 30,000
f) Promotes economic growth and stability: Insurance helps in mobilizing domestic savings in a big way. By investing the funds collected in financial markets, insurance helps in capital formation and furthering economic activities. Insurance assures compensation of the financial losses caused by specified events like fire, flood, industrial accidents etc. and considerably helps in maintaining economic stability.
g) Provides employment opportunities: Apart from other benefits, insurance has become a big industry wherein hundreds of entrepreneurs and thousands of employees are engaged.
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