A Beginner's Guide to Insurance
Having the correct insurance is essential for good financial planning. Some of us may have insurance, but few really grasp it or why it is necessary. For most Indians, insurance is an investment or a great way to save money on taxes. When asked about their assets, ordinary individuals proudly cite an insurance product as their primary investment. The percentage of suitably covered Indians is substantially lower than the about 5% of Indians who are insured. Few people consider insurance to be only that. Perhaps this is the only financial product that has seen widespread mis-selling at the hands of brokers who are too excited about marketing packages that connect insurance to investing, earning them large rewards.
What exactly is insurance?
Insurance spreads out a person's or business entity's major financial risk to a big group of people or businesses during a preset catastrophic event. The monthly or yearly compensation given to the insurance company is the cost of being insured. If the planned event does not occur within the time-frame indicated, the money paid as compensation is not recovered. Insurance is a method of dispersing risk across a group of covered persons to reduce their financial burden in the case of a shock.
The insured and the insurer
When you seek financial risk protection and enter into a contract with an insurance provider, you become the insured, and the insurance firm becomes your insurer.
Guaranteed sum
This is the sum of money the insurer guarantees to pay if the insured dies before the predetermined deadline. This excludes any incentives added in the event of non-term insurance. This guaranteed sum is known as Insurance Cover in non-life insurance.
Premium
The insured must pay compensation for the financial risk protection provided by an insurer. This is referred to as the premium. They may be paid yearly, quarterly, monthly, or according to the terms of the contract. If the total amount of premiums paid is many times less than the insurance coverage, it makes little sense to obtain insurance at all. Coverage premiums are determined by the number of years for which insurance is requested and the insured's age (person, vehicle, etc.).
Nominee
The nominee is the recipient named by the insured to receive the money promised and any other benefits. In the case of life insurance, it must be someone other than the insured.
Policy Duration
The term of the insurance is the number of years you desire protection. The insured chooses the term while obtaining the insurance coverage
Rider
Aside from the main coverage, some insurance plans may provide extra benefits as add-ons. These may be obtained by paying additional fees. Purchasing such things individually would be more costly. You may, for example, add a personal accident rider to your life insurance policy
Surrender and Paid-up Values
If you wish to cancel insurance before its term expires, you may do so and get your money back. In this case, the sum paid by the insurer is known as the surrender value. The policy is no longer in effect. Instead, if you cease paying the premiums in the middle but do not remove any money, the sum is referred to as paid-up. After the term, the insurer pays you a percentage of the paid-up value.
Now that you're familiar with the terminology, here's how insurance works in layperson's terms. An insurance firm collects money from a huge group of individuals who wish to protect themselves against a certain kind of loss. With the assistance of its actuaries, the corporation does a statistical study of the likelihood of a real loss occurring in a certain number of individuals and sets premiums that take into consideration the previously described criteria. It is based on the reality that not all insured would incur a loss simultaneously, and many may not suffer a loss throughout the contract period.
Insurance Types
Any risk that can be measured in terms of money could be insured. A life insurance policy may safeguard loved ones from income loss due to premature death. Mediclaim coverage may help you and your family safeguard against unexpected medical bills. Automobile insurance coverage may safeguard your vehicle against robbery or damage in an accident. A house insurance policy may safeguard your home against theft, fire, flood, and other disasters
Life insurance, health insurance, and automobile insurance are the most prevalent types of insurance in India. In addition to these, other forms are briefly covered in the following paragraphs. IRDA regulates and monitors the insurance industry (Insurance Regulatory and Development Authority).
Insurance for life
This kind of insurance protects against financial risk in the case of the insured's untimely death. 24 life insurance firms compete in this area, with Life Insurance Corporation of India being a public sector entity. There are several life insurance plans, the most basic of which is the term plan. Some of the most sophisticated insurance are endowment plans, whole-life plans, money-back plans, ULIPs, and annuities.
Insurance in general
Other than Life Insurance, all other insurance plans are classified as General Insurance. There are 24 general insurance firms in India, four public, National Insurance Company Ltd, New India Assurance Company Ltd, Oriental Insurance Company Ltd, and United India Insurance Company Ltd.
Motor insurance has the largest portion of the non-life insurance premium pie, followed by engineering and health insurance. Home insurance, vacation insurance, personal accident insurance, and business insurance are some other types of insurance available in India.
Purchasing Insurance
There are a plethora of policies to pick from. Because we cannot predict our future or prevent bad things from occurring, having insurance is a must. However, it would help if you
use caution while making your selection. Don't just accept what the agent says. Read policy papers to see what is covered, what features are available, and what occurrences are not covered.
1. Recognize Your Needs
Determine which assets or incidents must be safeguarded from loss or harm. Is it your life, health, car, or home? Next, identify what kind of harm or risk the assets are most likely to face. This will inform you what characteristics to look for in a policy. Of course, there will be unforeseeable losses, and coping with them may be too expensive. Nobody can anticipate that they will never suffer from catastrophic ailments, even if they are now absolutely well.
The most common error when purchasing insurance, especially life insurance, is considering it an investment. Insurance and investing in a single product should be separate. You lose on both counts since, for the same premiums, additional coverage could have been obtained in a term plan, and if the premiums were invested in better securities, your returns might have been many times higher.
Be cautious of agents who persuade you to purchase needless plans such as child life insurance, credit card insurance, unemployment insurance, etc. Instead of purchasing individual insurance for particular assets or occurrences, seek plans that cover a wide range of potential events under one umbrella. Whenever feasible, choose riders that make sense rather than purchasing them individually. You do not need insurance unless there is a reasonable likelihood of an occurrence occurring. For example, you do not need Accident Insurance coverage unless you are vulnerable to accidents and incapacity owing to your line of work or other factors. A solid life insurance policy with an accidental death rider, a premium waiver rider, or a disability income rider would suffice.
2. Recognize Product Features and Costs
The worst approach to choosing an insurance product or insurer is to blindly trust the advice of an agent or a friend. Shopping around for packages that meet your needs and filtering out those that provide cheaper rates for identical conditions like age, the quantity of coverage, and so on is a fantastic way to proceed. The company's website will include all the information regarding the product's features and costs. Many insurance products are now available for purchase online. Buying online is more cost-effective since agency costs are eliminated. When purchasing life insurance offline, inform the salesperson that you are only interested in term insurance.
Before you sign the contract, be certain that you understand what things are covered and which are not. In the case of damage or loss, it would be terrible to discover that the item you wanted to protect was instead excluded from coverage. So many individuals hurry to their insurers after being treated for ailments, only to discover that the sickness in question was not covered. Understand when the coverage starts and ends, as well as how claims may be made and losses recorded.
Don't select an insurance company because a neighbor is their representative; never allow them to persuade you to purchase from them. Insurance premiums may last for years and cost a lot of money. Look for the service given in addition to the rates paid. When confronted with a risk, you want the claims procedure to be simple by uncooperative workers at the insurance company's office. Seek responses from individuals with past experience with the firm for questions such as how customer pleasant and responsive the company is while addressing claims
3. Timely evaluation and upgrade
Your insurance must be reassessed during life stages or when the asset covered changes. Your coverage needs to be raised (or dropped), or you'll need to add a rider. When you get married, have children, your salary grows or falls significantly, purchase a house/car, and you are responsible for your elderly parents, you should examine your insurance coverage.
