Insurance – Meaning, Types, and Features

Insurance policy has emerged as a crucial investment instrument over the years. Based on the type of insurance plan, individuals can build a corpus and or secure the financial future of their family. However, those who are new to the concept of insurance and investment, in general, think insurance is only about life coverage.

In case you, too, are new to the concept, let us help you gain insight into the topic to allow you to ascertain the value and need of having an insurance policy.

Let us check out insurance meanings, types, and more.

What is an insurance policy?

An insurance policy is a legal arrangement between an insurer or insurance provider and an insured or policy buyer. Under the arrangement, the insured receives cash compensation from the insurer for losses incurred under certain conditions, such as death, disability, or damage to insured property.

The insured must pay a recurring premium to the insurance provider under an insurance policy. In case of a mishap, the insurance company pays the policyholder a fixed sum assured.

The true meaning of an insurance policy is protection against an unforeseeable and unsettling loss. If you experience an unusual incident causing you financial loss, your insurance policy provider may reimburse you, especially if the type of loss is specified in the policy plan.

Legally, insurance is defined as a contract wherein the insurer commits to reimburse the policyholder for damages suffered as a result of any unforeseen occurrence. The contract also includes a premium as a consideration, with the maximum available benefit amount referred to as the sum insured.

However, knowing more than insurance meaning is crucial to grasp its scope and value.

How Does an Insurance Policy Work?

To fully comprehend how insurance coverage operates, you need to be acquainted with the following terms:

• Premium: The premium is the sum of money people pay to the insurer in order to get coverage.
• Sum Insured: It is applicable to non-life insurance policies such as house and health insurance. It denotes the upper limit on the costs that you are insured for in a given year in the case of an unsettling incident.
• Sum assured: The sum assured is the amount paid to the nominee by the life insurance provider if the insured event occurs (the policyholder’s death).

The insurance policy outlines each of the criteria and situations wherein the insurance provider is required to pay the sum insured to you or the nominee.

When purchasing an insurance plan from an insurance company, you have to pay monthly payments or premiums for a certain period of time.

All policyholders’ premiums are collected by the insurance provider, who then pools funds to cover losses that may occur due to an insured incident. Notably, you must file a claim within the policy’s term to receive insurance benefits. However, the same is determined by the type of insurance policy you choose and the accompanying terms.

 What are the Components of Insurance Policies?

Traditionally, an insurance contract has been categorized as follows:

Life Insurance: It includes term life insurance, endowment life plan, money-back policy, Unit-Linked Insurance Policy, etc.

General Insurance: It includes mediclaim plans, vehicle insurance, home and property insurance, travel insurance, etc.

Typically, an insurance plan is a combination of several parts, and the following make up some of the most significant aspects of an insurance contract:

• Premium: This is the cash payment that makes the insurance contract legally binding.
• Policy Limit: A policy limit is a financial limit that is applicable to health plans and general insurance policies where the payout is based on the amount of loss. The maximum compensation for specific losses may be limited by the policy.
• Deductibles: These apply to both general and health insurance protection. It can be defined as the amount of loss that you will incur out of pocket. Only after your losses exceed the deductible level will the insurance company start to pay.

What are the Key Features of Insurance Policies?

 The following are essential features of an insurance policy that you must consider:

1. An insurance policy is means of risk-transfer
2. Insurance is a social solution because it allows several individuals who are subjected to the same hazard to combine their assets to suffer the loss
3. Insurance does not reduce the likelihood of loss or minimize the degree of loss.
4. As an insurance contract party, you should constantly try to avoid, reduce, and minimize losses. This is because you can only avail an insurance coverage against
5. risks whose incidence and extent are uncertain. Additionally, an insurance policy does not cover speculative, financial betting, or any commercial risks.

Perks of an Insurance

Individuals who avail of an insurance policy can benefit in multiple ways. Read along to check out the key benefits of having insurance coverage:

1. Financial security for your family: Insurance policies provide protection against the uncertainties of life and safeguard you from losses resulting from a variety of unforeseen circumstances.
2. Financial security: Certain situations, such as health issues, might have a big impact on your finances and money control. However, an insurance policy protects you from having to pay for such occurrences out of pocket.
3. Wealth creation goals and objectives: Insurance plans such as ULIPs provide opportunities for investment and aid in meeting your basic financial goals.
4. Wealth preservation: Life insurance policies such as endowment and money back policies are among the most secure long-term investments in the market. These schemes assist you in safeguarding your wealth against inflation and taxes over the long term.
5. Wealth distribution: Only the best investment options in Indiaprovide the kind of security that life insurance pension plans guarantee. Such plans offer extensive pension coverage, thus guaranteeing a steady flow of income years after retiring from a job.

Tax Benefits of Insurance Policies

• Insurance, in addition to providing financial protection, also provides tax advantages. Here are a couple of the tax advantages offered by insurance policies:
• Section 80C of the Income Tax Act allows you to deduct up to Rs 1.5 lakh in life insurance premiums.
• Section 80D allows you to file a claim for a medical insurance premium of a maximum of Rs 25,000 for yourself and your family. It also allows an additional Rs 25,000 for your parents. If the insured is a senior person, the deduction limit increases to Rs 50,000.
• The life insurance policy benefits you, or the nominee, obtain from the insurance provider are tax-free under Section 10(10D). This implies that a life insurance plan’s maturity value and death payout are tax-free.

However, the policy’s maturity benefit is tax-free if your yearly insurance premium does not surpass 10% of the base life cover.