What's inside? 🧐
- Introduction
- What is the definition of insurance?
- Different types of insurance policies available in India
- What are the benefits of insurance?
- Tax benefits of various types of insurance in India
- Factors defining your life insurance coverage eligibility
- How to buy insurance?
- FAQs
Introduction
In a world where risk and uncertainty are inherent, insurance stands as a reliable shield against the unpredictable. Insurance is a multifaceted tool, offering protection across different aspects of our lives. From shielding our health and loved ones to securing our possessions and ventures, the array of insurance types can seem overwhelming.
In this comprehensive guide of types of insurance, we aim to demystify the world of insurance, breaking down the nuances of each type and providing clarity on their unique purposes and benefits.
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What Is The Definition Of Insurance?
Insurance is a legal agreement between two parties – you, the individual seeking coverage, and the insurance company, also called ‘insurer’. The insurer commits to compensating your financial losses resulting from unforeseen events in exchange for premiums. In simpler terms, insurance is a way to transfer your risks to the company, ensuring coverage for unexpected setbacks, and the premiums you pay facilitate this arrangement.
Covering various risks, from life to health to vehicles to travel and more, insurance safeguards what's important to you. It operates on the principle of 'risk pooling,' where the insurer collects premiums from all clients, creating a pool to cover losses in case of an insured event. If no claims are made during the specified period, no benefits are paid, but there are various types of insurance products offered by insurance companies today which also involve a savings element attached to it.
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Different Types Of Insurance Policies Available In India
While there are several types of insurance plans available in the market, they can be broadly grouped into two main categories -
👉General Insurance
When unexpected things happen, like damage or loss, a general insurance policy steps in to financially support you. It's your safety agreement for all those non-life situations, ensuring you don't face a financial hit. This type of insurance covers everything valuable to you – your home, car, bike, health, travel, and more, providing compensation for any loss from specific financial events, excluding death. It's your financial backup plan, ready to assist when things go wrong.
Let’s break down each of these types of insurance for you -
1️⃣Health Insurance A health insurance policy is like a guardian for your well-being. It is a type of insurance that covers hospitalization expenses incurred by you for any illness, accident, or injury. It tends to cover any unexpected hospitalization expenses, medical bills, ambulance cost, room and nursing expenses, pre-and post- hospitalization costs, daycare procedures, etc. You pay a premium, and in return, health insurance becomes a protective shield for both your savings and your health. It ensures that you and your loved ones can enjoy life without worrying about unexpected medical expenses.
2️⃣Motor Insurance A motor insurance policy, simply put, is protection for your wheels. It helps when your vehicle experiences accidents, theft, natural disasters, etc., by offering financial support. This insurance policy covers you, your vehicle, and even third-party individuals and their property. As per the law, having a third-party motor insurance policy is mandatory, as stipulated by the Motor Vehicles Act of 1988. If you drive without it in public, you could get into trouble. Whether you buy it online or offline, make sure it's from a company authorised by the Insurance Regulatory and Development Authority of India (IRDAI).
3️⃣Home Insurance A home insurance policy is like a shield for your living space and belongings. It's there to support you if unexpected things happen, like burglaries, fires, floods, earthquakes, storms, lightning, explosions and other perils. This insurance policy ensures that you won't face a huge financial burden if something goes wrong at your home. By paying regular premiums, you're investing in the safety of your home and personal belongings. It gives you peace of mind, knowing you're financially protected in case of specific unfortunate events.
4️⃣Fire Insurance A fire insurance policy is like a safety net for individuals and businesses, shielding them from financial losses caused by fires. It covers damages from various fire sources, including electricity mishaps, gas explosions, lightning, natural disasters, etc. If a fire occurs, the insurance payout steps in to aid in rebuilding or repairing the damaged property, facilitating recovery from the loss, etc. It's important to note that for a claim to be valid, fire must be the primary cause of the damage or loss. In simple terms, a fire insurance policy is a protective measure against the unexpected, ensuring financial support when flames bring unforeseen challenges.
5️⃣Travel Insurance A travel insurance policy is gaining popularity in India as more people explore domestic and international destinations. Think of it as a security blanket for your travels, shielding you from unforeseen events and financial setbacks while you’re travelling. This insurance policy covers various situations like trip cancellations or delays, emergency healthcare, injuries, evacuations, damaged or delayed baggage, loss of passport, accidental death or disability, and other unforeseen events. Whether you're exploring new places or relaxing on a vacation, a travel insurance policy ensures you have a financial backup in case things don't go as planned, offering peace of mind throughout your journey.
👉Life Insurance
A life insurance policy, as the name implies, is a plan you get to cover your life. It's an agreement where the insurance company promises to give a sum of money to your loved ones (like your spouse, children, etc) if something unfortunate happens to you while the coverage is active. To keep this protection intact, you pay regular premiums. The primary purpose of a life insurance policy is to make sure your family is financially secure if you're not there anymore. Besides that, it also lets you save for the long term and reach goals like retirement, your child's education, weddings, etc. Here are some of the types of life insurance policies available in the Indian market -
1️⃣Term Insurance
A term insurance policy offers a fixed sum of money to your family if you pass away during the policy period. This money can help them clear debts, handle everyday expenses, and more. But here's the catch - if you live beyond the policy period, there are no benefits for you since it’s a pure risk insurance cover. It's all about making sure your loved ones get financial support if something unfortunate happens to you while the policy is active. However, there are no returns if you live beyond the policy's duration.
2️⃣Whole Life Insurance
A whole life Insurance policy, true to its name, is a life insurance plan that provides financial protection to you throughout your life - up to 99/100 years of age. If the unexpected happens during the policy term, the nominee receives the cover amount. Additionally, there might be a payout when you reach a specific age. The primary aim of a whole life Insurance policy is to provide lifelong financial security for your family. People often see it as a guaranteed gift or legacy to ensure their loved ones lead a financially comfortable life. Also referred to as permanent life insurance, it's a long-term commitment for lasting peace of mind.
3️⃣Endowment Policy
An endowment policy is a unique life insurance plan that combines both insurance and savings. It not only offers life insurance coverage but also helps you build a savings fund. In the unfortunate event of your demise during the policy term, the death benefit is provided to your nominee. On the flip side, if you outlive the policy period, the maturity benefit is paid to you. Essentially, it's a dual-purpose plan that provides financial security for your loved ones in case of the unexpected and offers you a savings payout if all goes well.
4️⃣Money-Back Policy
Money-Back plans are investment options with minimal risk. You invest money over a set period, and later, you receive scheduled "money back" installments, typically with a guaranteed return. It is designed to meet future financial needs spread over time. If, unfortunately, you pass away before the plan matures, this policy may provide a lump sum benefit. In essence, money-back plans combine the desire for future income to meet upcoming expenses with an added layer of financial security through a death benefit. It's a balanced approach that addresses both future financial goals and unforeseen circumstances.
5️⃣United Linked Insurance Policy (ULIP)
It is a type of life insurance plan that combines two components - investment and insurance. With a ULIP, you can invest in market instruments to achieve your long-term goals while ensuring life cover for your dependents. A part of the premium you pay provides life insurance cover, and the rest is invested in the funds of your choice. ULIPs help you save for significant milestones like funding your spouse's education, planning your child's wedding, buying a home, etc. Alongside this, they ensure financial security for your family in case of any unfortunate events.
6️⃣Child Insurance Policy
A child insurance policy is a type of life insurance plan purchased by parents, aiming to accumulate funds for their child’s significant milestones like education, marriage, etc. It serves as a safety net, ensuring a secure future for the child. This plan has two key aspects:
- Investment/Savings: It helps you build a fund for major life goals such as higher education, marriage, etc. Investing and saving money can help you build a fund for big life goals, like education or marriage.
- Insurance: It ensures your child stays protected even if something happens to you. With a child plan, if the parent who owns the plan passes away, the insurer waives off future premiums, and the plan continues until it matures. At maturity, your child gets a lump sum payout or accrued bonuses, depending on the plan. It's a way to secure their future, no matter what.
7️⃣Retirement Policy
It is designed to fulfill your financial needs post-retirement. Insurance companies offer two primary types of retirement plans - a pension accumulation plan and an annuity plan. These policies are crafted to ensure financial security during your retirement years.
👉Personal Accident Insurance
We’ve written extensively about the underrated risk of disability and the Personal Accident Insurance several times, and we strongly recommend that every earning member of the family purchases this policy.
Simply put, it protects you against the financial risk of accidental disability, resulting in increased expenses and a simultaneous loss of income. Based on the severity of the disability a benefit amount is paid - which can be used as an income-replacement for the family’s needs.
What does it cover?
A Personal Accident Cover covers a wide range of accidental disabilities -
- Permanent Total disability: Situations where you suffer from irreversible injuries with a loss of a core faculty of the body that significantly reduces your ability to earn and live a regular life - such as complete permanent blindness, loss of both hands or loss of both legs.
- Permanent Partial disability: Situations when you suffer a significant injury that is for life and affects a part of your body like losing sight in one eye, losing one hand or a leg etc.
- Temporary Total disability: Situations when you are injured for a certain period of time, during which you are temporarily immobile or paralysed and might not be able to work or perform regular activities.
Some policies might also cover for an Accidental Death benefit paid to the nominee, in case death happens as a result of the accident.
Why is it important?
There’s a single reason why. Accidents can happen to anyone, anywhere. You don’t see them coming, you cannot completely stop them from happening, and they can happen to the healthiest and most cautious of us!
- In India, around 1214 road accidents happen daily.
- And an equal number of accidents are estimated to happen at home
And, the financial impact of accidental disability could be even more devastating than the death of the earning member. You might not be able to continue with the same job, while you’ll spend a lot on restructuring the house, nursing, doctor visits, medicines, tests, physiotherapy etc. which won’t get covered by health insurance.
A Personal Accident Cover will help you pay for all these costs, without compromising your family’s lifestyle.
How much does a Personal Accident Cover cost?
Generally speaking, personal accident covers can be inexpensive. However, you should note that premiums will be based on your risk class. A 15-lakh plan that covers accidental death, permanent and temporary total disability would cost only Rs 2213 including taxes for risk class-1. However, for risk class-3, the same plan would cost Rs. 3540 inclusive of taxes.
*Premium has been taken on 17th May 2021
Source: MyInsureBuddy Research Desk
You can also get a detailed insight into premiums and comparisons from this article, we’d written in the past.
Things to know -
A minimum and maximum sum assured is fixed for your profile by the insurer, and you can choose a suitable cover based on your budget and needs, within those limits.
👉Critical Illness Insurance
The irony of our generation is that we might live longer than our ancestors - thanks to medical science, but will have to endure several serious diseases along the way. And, much like accidental disability - a critical illness too will cost your family way more than even the death of the earning member.
We’ve heard of senior executives earning crores yearly, having to take up low-paying, less-stressful roles after suffering a heart attack. Such instances immediately impact the quality of life your family enjoys, while crippling your bank balance quickly.
A Critical Illness insurance is your protection against such a possibility.
Check out our eBook - The Most Definitive Guide To Critical Illness, for free here!
What does it cover?
Every Critical Illness plan provides a list of illnesses that will be covered by it. In case you’re diagnosed with any of those diseases, you’ll be paid a fixed amount of money. Based on the plan - you should be aware of ‘waiting periods’ for certain conditions, as well as ‘permanent exclusions’ that will never be covered. You should be mindful of these before signing up for any policy.
Things to know -
- You can either buy a Critical Illness cover as a standalone policy, or as a Rider along with your term insurance plan. Compare the pros and cons of each option including overall cover, limitations, exclusions, special terms and conditions and cost - before finalising an option.
How much does Critical Illness Insurance cost?
Critical Illness Riders (bought along with a term insurance or health insurance plan) might cost you considerably lower in the long-run as the premiums stay fixed for a certain duration (or the entire term of the base policy).
Standalone Critical Illness covers, could be more expensive while providing comprehensive coverage to all your conditions. In this case, the premiums change as you grow older, and could be pretty expensive in your old age.
We did a detailed analysis and comparison of premiums of all types of Critical Illness covers across brands in our eBook - The Most Definitive Guide To Critical Illness. Do get your copy for free at the above link!
👉Two-Wheeler Insurance
Ok. We know that you’re aware about two-wheeler insurance. But it is important to note, that due to the low value of the product, no sales person will ever follow up with you to buy one, and that’s the point we are trying to make.
A two-wheeler insurance policy provides financial protection to the vehicle owner against any unforeseen events like an accident, theft or any serious damage to the motor vehicle.
What does it cover?
Two-wheeler insurance plans are of two basic types.
- Comprehensive Insurance: This is an extensive policy covering situations such as total loss of the insured vehicle, theft as well as third-party financial losses - ie., losses caused to a person (other than the owner of the insured vehicle) involved in the accident. As an option, you can choose a Rider for Personal Accident cover along with this policy to provide financial relief if disability or death is caused as a result of an accident using this vehicle.
- Third-party Insurance: This is a limited policy that only covers financial losses and injuries caused to a person (other than the owner or passengers on the insured vehicle) or their property because of the accident caused by this vehicle.
Things to know -
- It is mandatory for every vehicle in India to have a third-party insurance cover.
- The comprehensive insurance policy however, is not mandatory.
Why is it important?
Firstly, you must have at least a third-party insurance plan for your two-wheeler, because otherwise you’re breaking the law.
Plus - if you’ve ever worried about parking in an open area, or on a busy street - your fears are not completely unfounded - bike theft is rampant in our country. To top all this, we know for a fact that our streets aren’t exactly the easiest to navigate, especially if you ride a scooter or a motorbike.
And - the easiest way to protect yourself against the risk of such accidental damage or theft - is to buy this policy.