In this article, we will understand Basics of Insurance in simple and easy language and try to understand its various important aspects. So read this article till the end.
Insurance gives assurance, When some unfortunate event happens in life. if there is an assurance then whatever happens, we will compensate for it;
Note – If you want to understand the basics of share market from zero level then you should start with Part 1. – Share Market and Related
| Basics of Insurance
Insurance is a component of capital market in which a company or government provides a guarantee of compensation for certain losses such as, illness or death in return for payment of a fixed premium. Simply put, any such thing which reduces the risk is called insurance.
This is a legal agreement between two parties. Out of which one party is the insurer i.e. the insurance company, and the other party is the insured i.e. a person.
In the event of an insured contingency, the insurance company promises to reduce the loss of the insured and the insured pays a specific premium in return for this promise made by the insurer.
| What is an insurance policy ?
A legal contract which is formed as a result of an agreement between the insurer and the insured is called an insurance policy. This insurance policy contains the details of all the conditions and circumstances under which the insurance company will pay the sum insured to the insured.
| type of insurance
In the context of India, insurance is mainly divided into two categories. 1. Life insurance 2. General insurance .
Where a human life is insured in life insurance, assets are insured in general insurance. So let us understand these two in more detail.
1. Basics of Life Insurance
In life insurance, the risk is covered from accident to death. This means that in case of accident or death of the insured, the insured or the nominee gets compensation from the insurance company.
The Government of India nationalized the insurance sector in 1956 and the opening of insurance companies in the private sector was also banned.
Life Insurance Corporation of India i.e. LIC was established by acquiring 245 domestic and foreign life insurance companies operating at the same time.
Talking about today, this is the only government company that does life insurance, after all the other life insurance companies that will be found are all private companies. If you want, you can see a list of all of them on Wikipedia .
| types of life insurance
⚫ There are generally 7 types of life insurance. Which is discussed below.
1. Term life insurance – As the name suggests, it is for a fixed time period. This time period can be 10 years, 20 years or 30 years. If the insured dies within this time interval, then a fixed amount is given to the nominee by him. The specialty of this life insurance is that its premium is very low.
2. Unit Linked Insurance Plan – ULIP is a combination of investment and insurance in which the benefits of all three are insurance, wealth creation and tax-saving investment.
The money paid in ULIPs as premium is invested partly in the fund (i.e. in bonds and shares) and partly on risk cover. However, the insured has the freedom to decide how much money he wants to invest in shares and how much money in bonds.
There is no guarantee of fixed returns as the returns depend on the volatility of the market.
3. Endowment Policy – Like ULIP, this too is a mixture of investment and insurance. But the difference is that it covers the risk of a fixed period, at the end of that period the fixed amount along with the bonus is returned to the insured.
And if the insured dies during that period then the sum assured is returned by him to the nominee but without bonus.
4. Moneyback insurance policy – This type of life insurance is also a mixture of investment and insurance like both the above insurance policies. But the difference is that the Sum Assured starts getting paid in installments during the policy term itself.
The last installment is payable at the end of the policy term. If the insured dies during the policy term, the sum assured is received by the nominee.
5. Whole Life Insurance Policy – There is no fixed term of this insurance. That is, as soon as you die (irrespective of your age) the Sum Assured will be given to the person nominated by you. Its premium is very high.
6. Retirement Plan – This type of insurance plan helps in building an adequate amount of capital to lead a worry-free retirement life. A fixed sum is paid as pension to the insured after a stipulated period or after his death to the nominee.
This payment can be on monthly, half yearly or yearly basis. If you want, you can opt for annual payment or single payment after the age of 60 years.
7. Child insurance policy – These plans are designed keeping in view the needs of children like education expenses, foreign studies, marriage etc. Most child insurance policies offer a single payout or annual payment to the child after the age of 18.
If the parent dies during the policy term, the child or family is paid. Some insurance companies waive off the premium in case of death of the policyholder and pay a lump sum after the maturity period.
2. Basics of General Insurance
As we have read above, in general insurance, assets are insured which include vehicles, houses, animals, crops, etc.
In 1971, the Government of India acquired 107 domestic and foreign companies operating in the general insurance sector and formed a government insurance company, General Insurance Corporation.
Today four companies work under it – (1) The Oriental Insurance Company (2) United India Insurance Company (3) National Insurance Company (4) New India Assurance . Apart from this, any number of general insurers companies You see, are all private companies. You can see a list of them all on Wikipedia
| types of general insurance
⚫ There is no fixed number for this, yet let’s take a look at some of them.
⚫ Motor Insurance – Under this, insurance is done for damage or theft of motor vehicle, two wheeler, three wheeler or four wheeler. Motor insurance is mandatory in India under the Motors Vehicle Act.
⚫ Home Insurance – Home insurance protects the house and the things inside it. After purchasing the insurance policy, if there is any kind of damage to the house, then it is compensated by the insurance company.
⚫ Travel insurance – Travel insurance covers your travel, it can be domestic travel as well as foreign travel. Some travel insurance covers loss or theft of valuables, while some travel insurance covers accidents and medical emergencies.
Similarly, there are many other types of general insurance which keep coming up from time to time. Such as – Marine Insurance, Commercial Insurance, Rural Insurance, Crop Insurance etc.
The Agriculture Insurance Company of India Limited (AICIL) was set up by the Government of India in 2002 to promote agricultural insurance . The Pradhan Mantri Fasal Bima Yojana, which was launched in 2016, is being operated by the same government company AICIL.
So in total today 6 government companies are working in the insurance sector, out of which one is working in the field of life insurance, 4 in the general insurance sector and 1 in the field of agricultural insurance (although agricultural insurance is considered as general insurance only.
Apart from this, all private companies are working in the insurance sector. All these are regulated by the Insurance Regulation and Development Authority (IRDA). It was established in the year 2000 AD.
| benefits of insurance
Insurance is a risk management tool that not only benefits individuals and businesses but also benefits society and the economy in many ways. Following are some of the important benefits of insurance:-
⚫ Peace of mind – Since insurance provides protection against various uncertainties that can put you or your family in financial trouble, having insurance provides peace of mind and a sense of security.
⚫ Risk reduction – tries to reduce the risk due to accident or any unforeseen event with financial help.
⚫ Easy Loans – Especially in the case of home loans, having an insurance cover increases the chances of getting a loan easily from the lender.
⚫ Saving habit – There are many life insurances that come with investment cum protection benefits. As policies like endowment insurance help in achieving long-term financial goals.
⚫ Providing tax benefits – Many types of insurance provide tax benefits on the premiums paid. For example, premiums paid for life insurance plans are exempt under section 80C of the Income Tax Act. Similarly, premiums paid for health insurance plans are exempt under section 80D of the Income Tax Act.
Overall, you have seen how many benefits of insurance are there, then very few people get insurance in India. Why is this? Some of the reasons for this are as follows –
(1) The complex and lengthy process of settlement of insurance claims;
(2) easy understanding of policy-rules of insurance companies;
(3) Lack of education and awareness among the population;
(4) Lack of public trust in insurance companies.
Overall, this is the Basics of Insurance , I hope you have understood. For better understanding, some other article is given below, must read it too.
| Share Concept Series (BCS)
Basics of Insurance