What is Insurance: How Works And Main Types of Policies

The future remains uncertain for all of us, and unforeseen emergencies such as illness, accidents, or even death can strike suddenly and unexpectedly. In such circumstances, insurance plays a pivotal role by providing financial protection for you and your family.

To understand insurance better, it is essentially a legal agreement between the insured (the individual or company obtaining the policy) and the insurer (the company providing insurance). The insured pays a specific amount, known as the “premium,” to the insurer. In return, the insurer commits to providing a financial payout in case of unfortunate events like sudden demise, accidental injuries, or damage to property.

In simple terms, insurance is a fundamental concept. When you possess something valuable that you cannot afford to lose or repair, insurance becomes essential. By paying premiums, you gain peace of mind, knowing that the insurance company will help mitigate financial losses if unexpected events occur.

Key Takeaways:

  • Insurance is a legal agreement between the insured and the insurer, offering financial coverage for specified losses.
  • The insured pays a premium to receive insurance coverage.
  • The higher the sum assured, the lower the premium.

How Insurance Works:

Insurance acts as a safeguard against financial losses, and the insured and insurer enter into a legal contract outlining the terms and conditions. In case of an unfortunate event, the insured or their beneficiaries can file a claim, and upon approval, the insurer settles the claim.

The insured pays regular premiums for coverage, and the insurance provider, having multiple clients, can afford to offer high coverage at a relatively low price. Insurance is categorized into life insurance and general insurance in India.

Types of Insurance Policies:

  1. Life Insurance: Provides financial support to the family in case of the policyholder’s demise. Variants include term insurance, endowment plans, retirement policies, and more.
  2. General Insurance: Non-life insurance policies covering health, motor vehicles, home, and travel.

Benefits of Purchasing Insurance:

  • Protection for you and your family during unforeseen events.
  • Long-term savings and wealth building.
  • Higher coverage at affordable premiums.
  • Premium payment flexibility.
  • Tax savings under applicable sections.

Also Read: Choosing Right Health Insurance Plan for Your Needs in 2024

Insurance Policy Terms:

  • Premium: Amount paid by the policyholder for insurance coverage.
  • Policy Term: Duration of the active policy.
  • Additional Riders: Optional add-ons enhancing coverage.
  • Due Date: Deadline for premium payment.
  • Deductible: Amount borne by the policyholder.
  • Co-payment: Portion of medical expenses borne by the insured.
  • Annuity: Periodic payment throughout the policyholder’s life.

In conclusion, obtaining the right insurance policy is crucial for financial security. Researching and understanding each insurance product, along with seeking advice from a financial advisor, can aid in making informed decisions tailored to your needs. Purchasing insurance not only provides protection but also fosters a savings habit, contributing to a substantial financial portfolio over time.


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