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What is insurance, and what are its types?

Updated: Apr 28, 2023

Insurance is a type of financial product that protects people, families, and businesses from the financial losses brought on by unforeseeable occurrences like accidents, illness, property damage, or death. It is a product for risk management that shifts the risk of monetary loss from the policyholder to the insurer. The insurer offers to reimburse the policyholder for any losses covered by the policy in exchange for a premium payment made by the policyholder.

There are many distinct types of insurance, including liability, health, property, and life insurance. Each sort of insurance is made to offer defence against a certain risk.

Life insurance: In the event of the policyholder's untimely demise, life insurance offers financial security to the policyholder's family. It makes sure that following the death of the breadwinner, the family will still have financial support. Term or endowment life insurance policies are available, depending on the needs of the insured.

Health Insurance: In the case of an accident or illness, health insurance protects individuals from the exorbitant expenditures of medical care. It pays for medical professionals' fees, hospital costs, and other associated costs. Individual or family floater health insurance policies are available, depending on the needs of the policyholder.

Property Insurance: Property insurance protects against loss or damage to property as a result of theft, fire, or other calamities. It includes houses, workplaces, and retail establishments as well as residential and commercial assets. Depending on the needs of the policyholder, property insurance policies can be all-risk or conventional fire and special danger plans.

Liability Insurance: Liability insurance provides protection against legal liabilities arising due to third-party claims. It covers the policyholder's legal liabilities arising from injury, death, or damage to the third party's property. Liability insurance policies can be public liability policies, professional indemnity policies, or product liability policies, depending on the policyholder's requirement.

Insurance policies come with several features and benefits that make them an essential tool for financial planning. Some of these features and benefits are as follows:

Financial Safety: Insurance offers protection against unanticipated events for the policyholder's family and themselves. It makes sure that the policyholder's financial plans won't get wrecked by unforeseen costs.

Peace of Mind: By reducing the risks associated with life, health, property, or liabilities, insurance gives the policyholder peace of mind. Without having to worry about financial dangers, it allows the policyholder to concentrate on their professional and personal lives.

Tax Benefits: Section 80C of the Income Tax Act provides tax advantages for insurance policies. Tax deductions for insurance premium payments are allowed up to Rs. 1.5 lakh annually. In addition, section 10(10D) of the Income Tax Act exempts the benefits from insurance policies from taxes.

Long-term Savings: Some insurance policies, such unit-linked insurance plans (ULIPs) and endowment plans, offer a savings component in addition to the insurance coverage. These contracts provide options for long-term investing and saving, which makes them the perfect instrument for budgeting.

Protection Against Inflation: For a certain premium, insurance policies give protection against inflation. This indicates that regardless of the rate of inflation during the policy's term, the coverage amount for the policyholder will not change.

Purchase convenience: Insurance policies can be bought online or in person, making it simple for policyholders to select the ideal insurance for their needs. Insurance policy purchases can now be conducted more easily and conveniently online.

However, insurance policies have several restrictions and disadvantages, just like any financial product. Following are a few of these restrictions and drawbacks:

Insurance policies only provide coverage for the risks listed in the policy, which is known as limited coverage. The insurer does not make up for any losses or risks that are not covered by the policy.

In conclusion, insurance is a crucial instrument for financial planning since it protects individuals, families, and organisations against the monetary losses brought on by unplanned circumstances. Given the variety of insurance options, it is crucial to pick the one that best meets the needs of the policyholder. Insurance offers a number of advantages, including long-term savings, inflation protection, tax advantages, financial security, and peace of mind. However, it is also crucial to be aware of the restrictions and disadvantages of insurance policies, such as their comparatively restricted coverage. Therefore, before acquiring any insurance policy, it is essential to comprehend the policy terms and conditions. Overall, insurance is a crucial component of financial planning that offers policyholders security and peace of mind.



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