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A Complete Overview of Insurance – Types and Definition

Insurance

In today’s time, every individual talks about Insurance Policies, and if you are a newbie or unaware of the details, the technical terms and diversified policies may often confuse you. Don’t worry, we have got you covered! An insurance policy is one of the vital financial products that acts as a savior throughout your lifetime in every situation. 

When you buy a car, bike, or home, or meet with an accident or have other health issues, insurance policies safeguard you financially and compensate for your loss. However, a lot of individuals have concerns like what is the definition of Insurance. How exactly does it work? And how can I decide which type of policy is best suited for me? We understand your concerns, and that’s why this guide entails a complete overview of Insurance. 

What does Insurance mean?

Life is all about risk, and insurance policies safeguard your risk in different situations and compensate you financially for the loss you suffer. Usually, a policy covers certain contingencies and if you meet with certain terms then, an insurance company or insurer will compensate or reimburse your economic loss in certain situations. However, policyholders must be aware of the deductible, policy limit, types of insurance, and coverage factors. 

In other words, insurance is a contract paper represented by an insurance company in which the policyholder receives financial protection in terms of financial compensation or reimbursement against their loss from the insurance company or insurer. The insurance company pools over the client’s risk with optimum compensation, however, the policyholder needs to pay to buy the policy depending on the term plan. 

In addition, having insurance in certain cases like when you buy a car, bike, or any other vehicle having an insurance policy is mandatory under Indian law. 

Why it is important to buy an insurance policy?

An Insurance policy protects you, your family, your business, or your assets from unexpected damage or circumstances. An insurance company assists you to cover unexpected costs like routine medical bills, vehicle repair costs in case of damage due to an accident, damage to your house, or theft of your assets.

Additionally, an insurance policy can offer a lump-sum amount to your family when a policyholder dies, which is referred to as Life insurance. Insurance can serve you peace of mind when an unexpected risk knocks at your life.

How does an Insurance policy work?

Insurance policies may seem quite complicated, but once we break down small steps, it does not feel like a difficult task. Though, the first step of every individual seeking to buy a policy is to approach certain Insurance companies, evaluate policies and select an ideal policy. The selected policy mentions what are the factors or types of risks that the policyholder would be protected from, which are referred to as inclusions and exclusions of a policy. 

When you select a policy, you need to pay a premium cost to your Insurance company. The premium can be paid in monthly, quarterly or 6 months, or yearly installments or some policyholders prefer to pay the entire amount off all at once. In addition, the price of the premium is dependent on the value and risk of the object or event that you decide to insure. 

For instance, if you are inexperienced or have less experience in driving, then you will have to pay a higher premium comparatively. According to official statistics, you are more likely to meet with an accident if you aren't an experienced driver. Whereas, when you gain experience in driving, and avoid accidents and motor offenses your premium costs less. 

Furthermore, if any uncertain circumstance occurs with you, your family, or with your assets you can claim your insurer or insurance company. The company would check and evaluate your claim and further analysis if a certain situation is inclusive in your policy based on all the analysis the company compensates or provides reimbursement for the loss that has been incurred by you. 

Essential terms in the field of Insurance

When you select an insurance policy, you will come across certain terms, and being aware of these keywords can make the entire process much easier to proceed. We are listing a few important terms for your better contemplation. 

1. Premium

A policyholder, whether you are buying a policy individually, for family or business you need to pay a premium to the insurance company to buy a policy. Simply put, a premium is the total cost of your policy. In addition, policyholders can choose the method to pay for premium i.e. either monthly, quarterly, 6 months payment, or yearly. 

In addition, the cost of premium differs on multiple factors like value or the risk you or the asset you are representing to the insurer. The insurance company would evaluate that you often would require to claim a policy and whether an individual presents a bigger or smaller risk compared to other policyholders. 

2. Coverage

Coverage refers to the amount of risk or liability that an insurance company offers to cover in any insurance policy. 

When you seek an insurance policy, you will find coverage of different levels. For instance, when you buy home insurance, you can either opt for building insurance or content insurance. 

Building insurance means it only covers the cost of repairing the structure of your property. Whereas, content coverage covers the cost of replacing the belongings or assets in your home. In some cases, there are policies where both building and content insurance are available or covered by the company. 

3. Cash Value

At times, life policies involve cash value which means the amount that can be borrowed or withdrawn from the policy when the policyholder is alive. Usually, the premiums of a policyholder are invested during the lifespan of the policy, which builds up a cash value that allows individuals to borrow or withdraw money against the policy. 

4. Claim 

A claim is referred to as a request when a policyholder asks an insurer to pay out the coverage offered in an insurance policy to overcome a certain loss or event. Furthermore, your insurance policy would assess your claim, analyze your policy and check all the factors that are inclusions and exclusions  on the policy and based on all these factors, they will pay out for your loss. 

5. Deductible

A deductible is when a policyholder needs to pay a certain amount from his bank account before an insurance company pays for the claim. Deductibles act as disincentives from large to small volumes and insignificant claims. 

Sounds confusing? Let’s say, if your car is damaged in an accident or under other circumstances, and the cost to repair your car is Rs. 6,000 then the first Rs. 3000 would be deductible which you would have to pay and the other Rs. 300 would be paid by the company after the claim is made and evaluated. 

Policies that involve high deductibles are less expensive as a high expense from policyholder’s accounts results in smaller or infrequent claims. Usually, deductibles apply per policy or claim and it varies on the type of policy, we will be learning about the types further in the blog. Additionally, deductibles in health plans may include individual or family deductibles. 

Read Also:- A Complete Guide to Building a Strong Financial Foundation

Types of Insurance Policy

Multiple types of insurance policies help individuals protect themselves against one or more threats, unexpected risks, and more whether it is life insurance or insurance for assets. While many individuals have concerns about how they can decide the ideal kind of insurance for themselves. You have come to the right page, this guide will help you understand different insurance types, their benefits, and more. 

1. Life Insurance

Life Insurance is the policy between the policyholder and the insurance company or insurer. This policy involves the insurance company compensating a lump sum of money to the beneficiary (Spouse, children, or other nominees) as perks of the policy after the policyholder's death in exchange for the premium that an individual pays for the policy term. 

In addition, as per the inclusions of the policy, individuals with critical illness or terminal illness can also benefit from this policy. However, actions of self-harm like suicide isn’t covered by any insurance policy. 

2. Health insurance

Health insurance policy offers individuals either cashless treatment in networking hospitals or reimbursement after a policyholder request for a claim in case of illness, sickness, or serious treatment like surgery which leads to hospitalization of the policyholder. 

As we mentioned above, an insurance company would provide cashless treatment to networking hospitals that they are connected with or offer reimbursement for medical/surgical expenses in the hospital. In addition, health insurance entails varied types of insurance, so before you finalize your policy you must be aware and select accordingly

Types of Health Insurance

  • Family Health Plan
  • Individual health plan
  • Mediclaim Insurance
  • Senior Citizen claim health Insurance
  • Critical illness Insurance
  • Cancer Insurance 
  • And more

Inclusions of Health Insurance

  • Hospitalization charges
  • Expenses of organ donation in case of organ transplantation
  • Cost of health checkup
  • Cost of daycare process
  • Domiciliary hospitalization cost
  • Pre and post-hospitalization expenses
  • Ambulance expenses 

Exclusions of health insurance

  • No reimbursement or compensation is offered during the first 30 days i.e. waiting period
  • Coverage for pre-existing illness is provided only after 2-3 years
  • Injuries that occurred due to war, nuclear activity, terrorism, or suicide are excluded
  • Treatment for AIDS, terminal sickness is not covered
  • Expenses for cosmetic treatment, plastic surgery, hormonal replacement, or sex change surgery. 

3. Term Insurance

Term Insurance is quite similar to Life Insurance, it comes with a pre-determined benefit within a limited period. The coverage offered under the policy ends as soon as the term ends, the policyholder can either choose to end the policy or renew the policy. Without renewing the term policy, policyholders cannot request a claim or benefit from the coverage of the insurance policy. 

The term insurance policy only guarantees death benefit and no maturity benefit to the beneficiary if the policyholder hasn’t renewed his or her term insurance. In addition, the premium for a term insurance policy varies under factors like sex, health, and age, and sometimes the applicant needs to undergo a health examination before a policy is issued. 

In some cases, as per insurance company rules or other conditions, a few individuals may be asked to submit additional details like pre-existing disease, medical family history, the status of smoking, occupation, and more. 

4. Insurance for Motor 

This type of Insurance protects your car, bike, truck, and other automobiles. Motor Insurance covers damage to your vehicle that occurred via natural or man-made risks. As per Indian law, every vehicle owner must have motor insurance for safety purposes or else he/she may be fined for the same. 

Categories of Motor Insurance

  • Car insurance
  • Bike Insurance
  • Third-party insurance

Car insurance

Car insurance covers the cost of any damage incurred to your car due to an accident. In exchange for the premium, an insurance company would pay all or most of the cost for the damage that occurred in the accident on the behalf of car owner

Bike Insurance

A two-wheeler or bike insurance policy provides coverage for the cost of damage that occurred due to theft, accident, or any loss due to an accident. In exchange for the premium, an insurance company would pay for the cost of repairing the vehicle and treatment for the rider instead of providing reimbursement to the vehicle owner. 

Third-party Insurance

Third-party Insurance covers all kinds of costs that are required to repair the vehicle incurred damage due to accident and bodily expenses in case of injury to a third party. As per the Motor Vehicle Act, third-party insurance is mandatory for every motor vehicle owner in India. 

Inclusions of motor insurance

  • Fire and burglary
  • Flood
  • Storm
  • Cyclone
  • Terrorism acts
  • Road mishaps
  • Landslide
  • Earthquake

Exclusions of Motor Insurance

  • When a driver drives under the influence of drugs and alcohol, coverage is excluded
  • Having an invalid or no license during the drive
  • Any loss or damage to the vehicle outside the geographical boundaries of the country
  • Vehicles used for illegal or criminal activities

5. Investment Plans

Investment plans help you secure your future with appropriate funds in your bank account. This plan can offer you the double benefit of investment and insurance where you can decide to invest in a market with certain valuable options and meanwhile pay a premium for insurance like other insurance types. We are listing a few types of Investment plans that you can consider to secure your present and future. 

  • Child Plans
  • Unit Linked Plans
  • Pension Plans

Individuals interested in such plans can ask their company and begin the journey of securing their future financially as soon as possible.

6. Endowment policy

This policy is a kind of life insurance wherein policyholders can benefit from life coverage and get to accumulate corpus till the tenure of the policy term. The corpus is provided to policy providers if or she outlives the policy term, and the funds are provided to the nominee if the policyholder dies amid the policy tenure. 

The perk of selecting this policy is that the policyholder can fund their various goals like retirement, marriage, buying a car, and many other things. 

Read Also:- Different Types of Mutual Funds and How They Are Priced

Bottom line

An Insurance policy helps you fund or cover your and your family’s unexpected costs and risk at the right time. It assists you to protect your expensive lawsuits and costs you for injuries, assets, home, vehicle, and death to ensure your family lives a safe and secure life. 

However, there are many types of insurance that you need for a better future, for which you need to consult an insurance company to get perfect guidance and advice. The common types include health insurance, motor insurance, and life insurance. If you do not have basic insurance, it's time to secure your future today. 

Frequently Asked Questions

Q.1 How can I apply for Insurance?

There are various options, though you can apply to insurance providers by comparing varied sites or directly approaching a broker. The process involves providing your personal information and the object or any item that you are insuring for. 

Q.2 Which kind of Insurance is the right option for me?

Selecting an insurance policy can be a personal choice, however, you can consult a professional or compare different types to analyze the right solutions that suit your needs. 

Q.3 Is there any waiting period to claim health insurance?

Yes, generally the waiting period for health insurance claims is 30 days from the date of inception of the policy. During this period, the insurance company isn’t obliged to pay the medical or other bills for the policyholder.