A Beginner’s Guide to Insurance

Having the right kind of insurance is central in order to sound financial planning. Some of us may have some form of insurance but very few actually understand what it is or why one must have it. For most Indians insurance policy is a form of investment or an outstanding tax saving avenue. Ask a typical person about his/her investments and they will proudly mention an insurance product as part of their core investments. From the approximately 5% of Indians which are insured the proportion of those sufficiently insured is much lower. Very few from the insured view insurance as solely that. There is perhaps no other economic product that has witnessed such rampant mis-selling at the hands of agents who are over enthusiastic in selling products linking insurance plan to investment earning them fat commissions.

What is Insurance?

Insurance is really a way of spreading out significant monetary risk of a person or company entity to a large group of people or business entities in the incident of an unfortunate event that is predefined. The cost of being insured is the monthly or annual compensation paid to the insurance company. In the purest form of insurance plan if the predefined event does not happen until the period specified the money compensated as compensation is not retrieved. Insurance policy is effectively a means of growing risk among a pool of individuals who are insured and lighten their own financial burden in the event of a shock.

Insured and Insurer

When you seek protection against financial risk and make a contract with an insurance provider you become the particular insured and the insurance company becomes your insurer.

Sum assured

In Life Insurance plan this is the amount of money the insurer promises to pay when the insured dies before the predefined time. This does not include bonuses added in case of non-term insurance coverage. In non-life insurance this assured amount may be called as Protection plans.

Premium

For the protection against monetary risk an insurer provides, the insured must pay compensation. This really is known as premium. They may be paid yearly, quarterly, monthly or as made a decision in the contract. Total amount of premiums paid is several times lesser than the insurance cover or it wouldn’t create much sense to seek insurance in any way. Factors that determine premium are the cover, number of years for which insurance will be sought, age of the insured (individual, vehicle, etc), to name a few.

Nominee

The beneficiary who is specified by the insured to receive the sum certain and other benefits, if any will be the nominee. In case of life insurance it must be someone else apart from the insured.

Policy Term

The amount of years you want protection for will be the term of policy. Term is determined by the insured at the time of purchasing the insurance policy.

Rider

Certain insurance policies might offer additional features as add-ons in addition to the actual cover. These can be utilized by paying extra premiums. In the event that those features were to be bought separately they would be more expensive. For example you could add on a personal accident rider with your life insurance.

Surrender Value plus Paid-up Value

If you want to exit an insurance policy before its term ends you can discontinue it and take back your cash. The amount the insurer will pay you in this instance is called the surrender value. The policy ceases to exist. Instead if you just stop spending the premiums mid way but do not withdraw money the amount is known as as paid-up. At the term’s end the insurer pays you equal in porportion of the paid-up value.

Now that you know the terms this is how insurance works in plain words. An insurance provider pools premiums from a large group who want to insure against a certain kind of loss. With the help of its actuaries the company comes up with statistical analysis of the probability of actual loss happening in the certain number of people and fixes payments taking into account other factors as mentioned earlier. It works on the fact that not all insured are affected loss at the same time and many may not experience the loss at all within the time of contract.

Types of Insurance

Potentially any risk that can be quantified in terms of money can be insured. To protect loved ones from loss of income due to immature death one can have a life insurance policy. To protect yourself and your family against unforeseen medical expenditures you can opt for a Mediclaim policy. To guard your vehicle against robbery or harm in accidents you can have an electric motor insurance policy. To protect your home against fraud, damage due to fire, flood along with other perils you can choose a home insurance policy.

Most popular insurance forms in Indian are life insurance, health insurance and electric motor insurance. Apart from these there are other types as well which are discussed in brief in the following paragraphs.
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The insurance sector is regulated plus monitored by IRDA (Insurance Regulating and Development Authority).

Life Insurance

This type of insurance provides cover towards financial risk in the event of premature passing away of the insured. There are 24 insurance coverage companies playing in this arena of which Life Insurance Corporation of India is a public sector company. There are several types of life insurance policies the simplest form of that is term plan. The other complex plans are endowment plan, whole life program, money back plan, ULIPs and annuities.

General Insurance

All other insurance policies apart from Life Insurance fall under General Insurance. You can find 24 general insurance companies in Indian of which 4 namely National Insurance Company Ltd, New India Assurance Organization Ltd, Oriental Insurance Company Ltd plus United India Insurance Company Ltd are in the public sector domain.

The biggest quiche of non-life insurance in terms of rates underwritten is shared by engine insurance followed by engineering insurance plus health insurance. Other forms of insurance offered by companies in India are home insurance, travel insurance, personal accident insurance, and business insurance.

Buying Insurance

There are an umpteen number of procedures to choose from. Because we cannot foresee our future and stop unpleasant items from happening, having an insurance cover is a necessity. But you need to choose carefully. Don’t simply go with what the real estate agent tells you. Read policy documents to find out what is covered, what features can be found and what events are excluded through being insured.

1 . Know your Needs

Determine what asset or incident must be protected against loss/damage. Is it you life, health, vehicle, home? Following determine what kinds of damage or risk exactly would the assets be most probably be exposed to. This will tell you exactly what features you should be looking for in a policy. Of course there will be losses which can not be foreseen and the cost of dealing with all of them can be very high. For instance nobody may predict that they’ll never suffer from essential illnesses no matter if they’re perfectly healthful at present.

The biggest mistake while it comes to purchasing insurance, particularly life insurance is to view it as an investment. Clubbing insurance and investment in a single product is a poor concept. You lose out on both fronts mainly because for the premiums you’re paying more cover could’ve been got within a term plan and if the monthly premiums were invested in better instruments your returns could’ve been several times more.

Be wary of agents who want to speak you into buying unnecessary guidelines like child life insurance, credit card insurance policy, unemployment insurance and so on. Instead of purchasing separate insurance for specific assets or incidents look for policies that will cover a host of possible events beneath the same cover. Whenever possible choose bikers that make sense instead of buying them separately. Unless there is a fair possibility of an event happening you do not need insurance for this. For instance unless you are very prone to incidents and disability due to your character of work or other reasons you do not have an Accident Insurance policy. A good Life Insurance policy with accidental death rider or waiver of premium rider or a disability income rider will do the job.

2 . Understand Product Features and Costs

The worst way of choosing an insurance product or insurer is to blindly follow the recommendation of an broker or a friend. The good way to do it is to shop around for products that will suit your need and filter out the ones offering lower premiums to get similar terms like age, quantity of cover, etc . All details you will need about the product features and costs will be provided on the company’s web site. Many insurance policies can now be bought online. Buying online is smarter mainly because premiums are lower due to elimination of agent fees. If buying offline in case of life insurance, tell the agent that you’re interested only within term insurance.