Insurance: Its Importance, Different Types, and Advantages

What is Insurance?

The insurance firm (insurer) and the individual enter into a legal arrangement known as insurance (insured). In this, the insurance company pledges to make good the losses of the insured on occurring of the covered contingency. The contingency is the occurrence that results in a loss. It might be the policyholder’s death or the property being damaged or destroyed. It’s referred to as a contingency since the outcome of the occurrence is unclear. In exchange for the insurer’s commitment, the insured pays a premium.

How does insurance work?

The insurance policy is a legal contract between the insurer and the insured for the insurance. The insurance policy specifies the rules and situations under which the insurance company will pay the insured person or nominees the insurance sum. Insurance is a means of safeguarding yourself and your loved ones from financial ruin. In general, a large insurance policy has a lower premium in terms of money paid.

Because very few insured people actually claim the insurance, the insurance firm bears the risk of offering a high level of coverage for a low cost. This is why you may acquire insurance for a large sum of money at a cheap cost. Any individual or business can seek insurance from an insurance company, but the insurance company has the final say on whether or not to give coverage. To make a decision, the insurance company will review the claim application. In most cases, insurance firms refuse to insure high-risk candidates.

Insurance Policy Components:

It is critical to understand how insurance works before selecting a policy.

A thorough grasp of these ideas will go a long way toward assisting you in selecting the coverage that best meets your needs. Entire life insurance, for example, may or may not be the best sort of life insurance for you. Any sort of insurance has three essential components (premium, policy limit, and deductible).


The premium is the cost of an insurance, which is usually represented as a monthly cost. The premium is calculated by the insurer based on the risk profile of you or your business, which may include creditworthiness.

For example, if you buy numerous high-end cars and have a history of reckless driving, you will almost certainly pay more for vehicle insurance than someone who owns a single mid-range sedan and has a spotless driving record. For comparable plans, however, various insurers may charge varying prices. As a result, doing some research to get the best pricing for you is necessary.

Policy Limit:

The policy limit is the most an insurer will pay for a covered loss under a policy. Maximums can be established for a certain time period (e.g., yearly or policy term), for a specific loss or injury, or for the whole policy term (also known as the lifetime maximum).

Higher limitations are usually associated with higher premiums. The face value of a standard life insurance policy is the sum paid to a beneficiary upon the insured’s death, and it is the highest amount the insurer will pay.


The deductible is a set amount that the policyholder must pay out of pocket before the insurance company will pay a claim. Deductibles act as a barrier to filing a high number of minor claims.

Depending on the insurer and the kind of insurance, deductibles can be applied per-policy or per-claim. Policies with extremely large deductibles are usually less expensive since the high out-of-pocket expense leads to fewer minor claims.

Special Considerations:

People with chronic health concerns or who require frequent medical treatment should opt for health insurance packages with lower deductibles.

While the yearly premium is more than a comparable coverage with a larger deductible, the lower cost of medical treatment during the year may be worth it.

What types of insurance available in India?

There are different types of insurance in India:

Life insurance:

Life insurance, as the name implies, is insurance for your life. You purchase life insurance to provide financial security to your dependents in the case of your untimely death. If you are the primary breadwinner for your family or if your family is largely reliant on your earnings, life insurance is very crucial. In the event that the policyholder dies within the policy’s term, the policyholder’s family gets financially rewarded.

Health insurance:

Health insurance is purchased to cover the expenses of pricey medical procedures. A variety of illnesses and conditions are covered by various types of health insurance coverage. You may purchase both general and disease-specific health insurance coverage. A health insurance policy’s premium normally covers treatment, hospitalisation, and prescription expenditures.

Car insurance:

Car insurance is a crucial item for every car owner in today’s environment. This insurance covers you in the event of an unforeseen event, such as an accident. Some insurance additionally cover damage to your automobile caused by natural disasters such as floods or earthquakes. It also includes third-party responsibility, which requires you to pay compensation to other drivers.

Education Insurance:

Child education insurance is similar to a life insurance policy that has been established specifically as a savings tool. When your child reaches the age for higher education and is accepted into college, education insurance might be a terrific option to offer a lump quantity of cash (18 years and above). This money can then be utilised to cover the costs of your child’s further education.

The kid is the life assured or the receiver of the funds under this insurance, whereas the parent/legal guardian is the policy owner. Using the Educational Planning Calculator, you may estimate how much money will be spent on your children’s higher education.

Home insurance:

We’ve all fantasised of having a home. Home insurance can assist cover the cost of replacing or repairing your home in the event of an accident, such as a fire, or other natural disasters or risks. Other events covered by home insurance include lightning, earthquakes, and other natural disasters.

What are the insurance tax benefits?

You may take advantage of income tax benefits in addition to the safety and security benefits of purchasing insurance.

  • Section 80C allows you to claim a tax deduction for up to 1.5 lakh in life insurance premiums.
  • Section 80D allows you to deduct up to 25,000 in medical insurance premiums for yourself and your family, as well as 25,000 for your parents.

These claims must be provided while e-filing submitting income tax returns.


You may purchase an insurance policy both offline and online, whether it is for life insurance, health insurance, or general insurance. There are indeed insurance agents who may assist you in purchasing a policy, there are websites where you can purchase a policy. Before picking and investing in an insurance coverage, be sure you’ve done your homework.

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