Insurance- what it is, types & when to invest

It is a legal agreement between two parties namely the insurer and the insured, where the insurer promises to compensate the insured in case of any financial loss in return for a regular payment received as premium.

The sum assured is paid in case of occurrence of any contingency.

But understanding about the types and benefits of insurance let us first learn about some of the important terms related to insurance:

1. Premium: It is the amount usually paid in monthly installments and is determined by the insurer. Premium basically is the cost you pay for getting insured. The amount of premium charged for a policy may vary from insurer to insurer.
2. Sum insured: it refers to the total value of the goods at risk and forms the basis of calculating the amount of premium.
3. Policy Limit: it is the maximum amount which is paid by the insurer in case of loss.

Types of Insurance Policies

All the insurance policies can be broadly classified into two main categories namely:

• General Insurance
• Life Insurance

General Insurance: General insurance is an agreement where the insurer promises to pay the insured for any loss other than the loss of life. It promises to compensate the financial loss caused to physical assets like home, vehicle, health, etc.

Following are the types of General Insurance policies:

1. Health Insurance: Health insurance is the most popular general insurance that promises to cover the whole or a part of risk and pays for an individual’s medical or surgical expenses.
2. Motor Insurance: An insurance policy that provides protection against any financial loss caused due to physical damage to vehicles like cars, trucks and other four and two wheelers is motor insurance. It provides protection even against loss due to third party liability.
3. Travel Insurance: A travel insurance is the one which provides protection against any loss caused during, before and after a trip like medical emergency, trip cancellation, loss of luggage etc.
4. Home Insurance: Home insurance is a property insurance that covers the financial losses caused to the residential property of an individual on account of damage due to fire, lighting, theft or any natural calamity.
5. Fire Insurance: An insurance contract where the insurer indemnifies the insured for any of the financial loss caused due to destruction or damage to property or goods by fire during a specific time period.

Life Insurance: Life Insurance is a contract between the insured and the insurer where the latter promises to pay the beneficiary of the policy an assured amount commonly called as death benefit upon the death of the insured person. In some cases events like critical illness or permanent disability also leads to payment of the sum assured to the insured party.

Following are the types of life insurance policies:

1. Term Insurance: Term Insurance is a type of life insurance contract wherein the insured gets coverage for a specific period of time. In case of sudden demise of the insured the sum assured is paid to the beneficiary as mentioned in the policy. In case the insured outlives the term of the policy, the policy gets terminated.
2. Whole Life Insurance Policy: A whole life insurance policy is an agreement where the beneficiary of the policy receives the death benefit in event of death of the insured. The policy remains active till the time the premium amount is paid. If the insured outlives the tenure of the policy it converts to a matured endowment. The policy can be withdrawn anytime by the policyholder.
3. Endowment Policy: It is a life insurance policy which apart from providing life cover also helps the policyholder to make regular savings. The policyholder receives a lump sum amount at the time of maturity of the policy if he outlives the term of policy or at the time of death of the insured.
4. Money-Back Plan: An endowment plan with liquidity benefit, a money-back plan is the one where the insured receives a certain percentage of the sum assured at regular intervals instead of receiving a lump sum payment.
5. Unit-Linked Insurance Plan: A combination of both investment and insurance options, ULIPs are life insurance products where policyholder can invest in options like stocks, mutual funds, or bonds.
6. Child Plan: A tailor-made investment and insurance plan which is purchased to meet the financial needs of a child like higher education, marriage etc. it also protects a child against unforeseen situations like sudden demise of parents.
7. Pension Plan: It is a retirement plan wherein a certain amount is paid regularly towards the pension plan to ensure a steady flow of income once the insured retires and is entitled for tax exemption under Section 80C.

Benefits of having an Insurance Policy:

1. Financial Security: Life is full of uncertainties. Having an insurance policy provides the financial security that any unforeseen loss can be effectively dealt with once the insured gets the life or asset at risk covered
2. Certainty of Cash flows: Insurance policy assures payment for financial losses covered under it. This reduces the chances of paying for losses from your pocket as there is certainty of cash flows.
3. Tax Savings: Some of the life insurance policies have a dual benefit of protection and tax deduction under Section 80C of the Income Tax Act.
4. Efficient Use of resources: To avail the benefit the insured is required to pay regular premiums. This helps the insured in putting their resources to the right and efficient usage.
5. Wealth Creation: Some of the policies have an investment option attached to it. This helps the insured in creating wealth for their secured future.

What is the right time to get insured?

The right time to buy an insurance policy varies from policy to policy. When it comes to buying a general insurance where you are getting any physical asset insured like a car or a house, the best time to but an insurance cover for it is right at the time of purchasing the asset however, it can even be purchased later.

When it comes to buying a health insurance or a life insurance policy the best time to purchase one is NOW!

It is said that the earlier you buy a life/health insurance the better it is.

Hence first invest a part of your money in buying an insurance policy and paying regular premiums and then in any other investment options like mutual funds, stocks etc.