All you wanted to know about Insurance

Introduction

Insurance is one of the most searched terms on Google. People use various terms, such as, Assurance, Indemnify, Indemnity, Protection, Coverage, Policy, Policy Cover, Life Insurance, Shield, Wedge, Safety, etc to search for information related to Insurance. Some of the most sought after queries relating to Insurance (on google) are listed below:

  • What is insurance?
  • What is life insurance?
  • What is health insurance?
  • Difference between life and general insurance?
  • What is term plan?
  • Which is best life insurance company?
  • What is the right insurance amount?
  • What are different types of insurances?
  • What insurance policy is best?
  • How to compare various policies?

This article is going to give insight into the emergence of the insurance sector in India. It will also discuss the various milestones in the development/ emergence of the insurance sector (both pre-independence and post-independence), types of insurances, and benefits of getting insurance done.

Evolution of the Indian Insurance Sectores?

All life insurance companies were nationalised to form LIC in 1956 to increase penetration and protect policy holders from mismanagement. The non-life insurance business was nationalised to GIC in 1972.

Malhotra Committee in 1993, recommended opening up of the insurance sector to private players. IRDAI, LIC and GIC Acts were passed in 1999 making IRDAI the statutory regulatory body for insurance, thus ending the monopoly of LIC and GIC.

In December 2014, Government approved the ordinance increasing FDI limit in insurance sector from 26% to 49%.

In 2015, Government introduced Pradhan Mantri Suraksha Bima Yojna and Pradhan Mantri Jeevan Jyoti Bima Yojana. Government introduced Atal Pension Yojana and Health Insurance in 2015.

Insurance companies raised more than US $6 billlion from public issues in 2017.

What is Insurance?

Insurance is a contract (represented by a policy) wherein an individual or an entity receives a guarantee for compensation against specified loss, damage, illness, theft, death, etc in return for payment of a specified premium. In short, it provides protection against a possible eventuality (which is clearly mentioned in the policy document). This is not an instrument meant to gain profit. It is just used to get compensation for the financial losses suffered.

Types of Insurance

Insurance can broadly be categorized into two types i.e. Life insurance and General insurance.

Life insurance is a contract (in the form of policy) between a policy holder (an individual or entity) and the insurance company (or State) wherein the beneficiary in entitled to receive monetary compensation/ benefits in case of death of the insured person or on maturity of the policy (depends on the policy taken).

General insurance provides cover for risks other than life. It includes travel, health, car, house, property, jewellry and other valuables from accidents and natural calamities/ disasters.

In the table given below, difference between life insurance and general insurance are given:

Indicators/ CriteriaLife InsuranceGeneral Insurance
Maturity benefitsApart from term plan, this also offers investment options and offers maturity benefits after specific durationsGeneral Insurance generally doesn’t offer maturity benefits. It just guarantees payout should there be any loss due to unavoidable circumstances (which are listed in the policy)
DurationGenerally, life insurance policies are of longer durationThese are generally of shorter term, typically a year
Premium paymentGenerally a fixed premium is to be paid annually for a specific period i.e 10 or 20 or 25 yearsMostly, the entire premum is paid in one go (at the time of buying of policy)
Financial planningLife insurance policies offer various long-term investment options for financial goals, such as, retirement planning, children’s marriage, etcGeneral insurance policies offer protection for your valuables against future crisis (list is mentioned in the policy document)
ClaimsSum assured is paid either on the death of the insured person or on maturity of the policy (depends on the policy taken).The loss is compensated (cannot exceed the sum assured) in case of unfortunate event (as per term and conditions of the policy)
Nature of contractThis is not an indemnity contract. It can be considered as an investmentThis is an indemnity contract
SavingsAlmost all (apart from term plans) insurance policies have savings factor included in the policy. These policies facilitate the policy holder to create wealth for the futureThere is no saving factor. This facilitates reimbursement of losses faced by the policy holder (upto the maximum of sum assured)
CoverageOnly life is covered. Gives option to plan for long-term savings, like retirement planning, insurance of life, children’s education and marriage, wealth creation, etcCovers all except life. It includes fire, health, auto, house, property, travel, marine, etc.
Insurable interestIn life insurance policies, insurable interest needs to be present only at the time of policy purchaseIn general insurance policies, insurable interest is expected to be present both at the time of policy purchase and also at the time of loss

What types of insurances does an individual need

There is no correct or wrong answer to it. It depends on personal needs and will vary person to person. Typically a person must go for the following :

Life Insurance: This is the first insurance that any person requires and must take. Of course, no one wants to die and no one even wants to think about it. But the fact is we are all going to die and we do not know when we are going to die. Death can happen tomorrow, after 5 years or may be after 50 years. Emotional and physical void created due to death cannot be filled but ADEQUATE life insurance ensures that financial needs of the family are taken care of.  

Health Insurance: We all know that no one wants to fall sick and none ever wants to visit a hospital. The harsh reality is most of us have to visit hospitals at least once. The fact is once you reach hospital, money flies. This is again unavoidable insurance that all must take. You can consider ‘Family Floater’ to economise the cost of premium.

Auto (Motor) Insurance: This kind of insurance provides protection against third party liablity arising due to an accident, damage to personal vehicle human error or natural calamity and personal accident cover. This insurance can be taken for two-wheelers, four wheelers and commercial vehicles. This insurance is mandatory for all vehicle owners and must be taken.

Following insurances are advisable:

Property insurance: This kind of insurance is advisable for all and protection must be taken against specified risks, such as, fire, theft, natural calamity, etc

Travel insurance: This insurance covers medical emergencies and trip-related losses, such as, flight accident, lost luggage, etc

Benefits of Insurance

The objectives of life insurance and general insurance policies are to secure the future our future and that of our loved ones against uncertainties of the future. Insurance provides policyholder with peace of mind. It is an effective way to manage risk.

Various tax benefits are also available on insurance policies. Premiums paid for a life insurance policy receive tax exemption under Section 80C of the Income Tax Act, 1961. Lump-sum benefits paid out by the life insurance policies are also exempt from income tax under Section 10(10D) of the Income Tax Act, 1961.

Conclusion

It can be concluded that taking insurance shouldn’t be an option but a necessity in the minds of all individuals who have family members dependent on them. There is a very famous saying, ‘Hope for the best but prepare for the worst’. I woud like to conclude by saying, ‘Never risk more than you can afford to lose’.

beinghappyalways

My name is Vivek Kumar Govila and I am PGDBM by qualification and Financial Advisor by choice. I have a total work experience of 22 years in the corporate sector with some of the biggest and well-known Consultancies. My passion for having something of my own prompted me to enter into this field. I am here to help families plan their future financial needs through financial planning. I can help in planning for protection, retirement planning, children's marriage, children's education and wealth creation.
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