What is Insurance? All Types of Insurance in India Explained.

What is Insurance ?

Insurance is a legal contract between two parties –individual or entity who receives financial protection (referred to as insured) and the insurance company that promises to compensate the losses (referred to as insurer) in return for the money (premium) paid by the insured. In simple words, insurance provides protection

Basically, the concept of insurance is to spread the risk of an individual or an entity among larger society. Insurance is a risk management mechanism wherein you transfer your risk to the insurance company by paying them the premium.

How Does Insurance Work ?

When you buy an insurance policy, you make regular payments to the insurance company for the amount of risk cover that you seek. Insurance companies pool the money paid like this by individuals and entities and then use them to compensate for the losses and damages arising out of insured events. Though it looks simple, insurance is a complex business. To understand about insurance contract, you need to be aware of its components, jargons and terminologies used in the contract.  

Let’s take a look at some of the important insurance jargons.

• Insurer: Insurer is the party in the insurance contract who underwrites an insurance risk or the one who provides you with the financial coverage during an unforeseen event
• Insured: Insured is the party in the insurance contract whose interests are protected by the policy
• Insurable interest: Insurable interest is the prerequisite for every insurance policy. A person or entity seeking insurance has an insurable interest in the subject matter when any damage or loss would impact in financial hardship
• Beneficiary: An individual who is eligible to receive the insurance proceeds if the insured person dies
• Sum insured: Sum insured is the maximum amount that the insurance company will pay you if the insured event takes place
• Co-payment: Co-payment of copay is a fixed amount or a percentage of the claim amount that insured needs to pay before the insurer compensates the remaining.
• Deductible: Deductible is the pre-decided portion of the loss that is paid by the insured.

Types of Insurance in India ?

Life Insurance Explained - 

A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured's death.

Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It's important to note that death benefits from all types of life insurance are generally income tax-free.

General Insurance Explained -

Insurance contracts that do not come under the ambit of life insurance are called general insurance. The different forms of general insurance are fire, marine, motor, accident and other miscellaneous non-life insurance.