What is Insurance?
Insurance is a legal agreement between two parties i.e., the insurance company and the individual. In this, the insurance company promises to make good the losses of the insured on happening of the insured contingency. The contingency is the event that causes a loss. It can be the death of the policyholder or damage/destruction of the property. It’s called a contingency because there’s uncertainty regarding the happening of the event. The insured pays a premium in return for the promise made by the insurer.
How does Insurance work?
The insurer and the insured get a legal contract for the insurance, which is called the insurance policy. It has details about the conditions and circumstances under which the insurance company will pay out the insurance amount to either the insured person or the nominees. Insurance is a way of protecting yourself and your family from financial loss. Generally, the premium for a big insurance cover is much lesser in terms of money paid. The insurance company takes this risk of providing high coverage for a small premium because very few insured people actually end up claiming the insurance. This is why you get insurance for a big amount at a low price. Any individual or company can seek insurance from an insurance company, but the decision to provide insurance is at the discretion of the insurance company. The insurance company will evaluate the claim application to make a decision. Generally, insurance companies refuse to provide insurance to high-risk applicants.
Types of Insurance available in India
- Life insurance
As the name suggests, life insurance is insurance on your life. You buy life insurance to make sure your dependents are financially secure in the event of your untimely demise. Life insurance is particularly important if you are the sole breadwinner for your family or if your family is heavily reliant on your income. Under life insurance, the policyholder’s family has financially compensated in case the policyholder expires during the term of the policy.
- Health insurance
Health Insurance is bought to cover medical costs for expensive treatments. Different types of health insurance policies cover an array of diseases and ailments. You can buy a generic health insurance policy as well as policies for specific diseases. The premium paid towards a health insurance policy usually covers treatment, hospitalization, and medication costs.
- Car insurance
This insurance protects you against any untoward incidents like accidents. Some policies also compensate for damages to your car during natural calamities like floods or earthquakes. It also covers third-party liability where you have to pay damages to other vehicle owners.
- Education insurance
Child education insurance is akin to a life insurance policy that has been specially designed as a saving tool. Education insurance can be a great way to provide a lump sum amount of money when your child reaches the age of higher education and gains entry into college (18 years and above). This fund can then be used to pay for your child’s higher education expenses. Under this insurance, the child is the life assured or the recipient of the funds, while the parent/legal guardian is the owner of the policy. You can estimate the amount of money that will go into funding your children’s higher education.
- Home Insurance
We all dream of owning our own homes. Home insurance can help with covering loss or damage caused to your home due to accidents like fire and other natural calamities or perils. Home insurance covers other instances like lightning, earthquakes, etc.
- Whole Life Insurance
As the name suggests, such policies offer life cover for the whole life of an individual, instead of a specified term. Some insurers may restrict the whole life insurance tenure to 100 years.
- Child’s Plan
Investment cum insurance policy, which provides financial aid for your children throughout their lives. The death benefit is available as a lump-sum payment after the death of the parents.
Such policies pay a certain percentage of the plan’s sum assured after regular intervals. This is known as survival benefit.
- Retirement Plan
Also known as pension plans, these policies are a fusion of investment and insurance. A portion of the premiums goes toward creating a retirement corpus for the policyholder. This is available as a lump-sum or monthly payment after the policyholder retires.
- Fire Insurance Policy
Fire insurance for fire accidents caused to the people who hold some assets like homes, or a building with business activities going on, the machinery, or even the stock damaged due to the Fire. Kinds of fire insurance policy in India:
- Specific Insurance Policy
In this policy, only the specific amount of money short can be claimed for the loss incurred due to the Fire.
- Comprehensive Insurance Policy
In this policy, the loss recovered is not only against fire-related happenings but also covers the loss/ damage caused due to burglary, robbery, etc.
- Floating Insurance Policy
This policy is usually taken by the people who run the business of import and export as this policy helps to recover the loss/ damage caused to the stock or goods of the owner at various places.
- Replacement Insurance Policy
In the case where the property is damaged due to fire, the insurance company compensates for the loss of that specific property according to the market price of that property pertaining at that time.
Tax benefits on Insurance in India
- Life insurance premium of up to Rs. 1.5 lakh can be claimed as a tax-saving deduction under Section 80C
- Medical insurance premiums of up to Rs. 25,000 for yourself and your family and Rs. 25,000 for your parents can be claimed as a tax-saving deduction under Section 80D
- Any earnings accumulated in your insurance policy’s cash value grow free from taxes. Please note that in a variable life insurance policy, cash value growth is not guaranteed.
- The death benefit of your permanent life insurance is generally passed on to your beneficiaries free from federal income tax.
- Premium withdrawals may be tax-free, depending on the type of coverage you have.
- Transfers among the underlying investment options of a variable life insurance policy are generally not subject to current income or capital gains taxes.
- Should your need for the policy’s death benefits decrease, you can take loans or withdrawals from a life insurance policy prior to age 59½ without the 10% early withdrawal penalty?
These claims have to be made at the time of e-filing income tax returns.
Be it life insurance, health insurance, or general insurance, you can buy an insurance policy offline as well as online. Just like there are insurance agents who will help you buy a policy, there are websites as well where you can buy a policy from. Ensure that you have done your research before choosing and investing in an insurance policy.