Planning to buy an insurance policy? Here is what you need to know

There are three main components of an insurance policy: premium, sum assured and deductibles

Insurance provides a cover to an individual for the financial losses he incurs due to an unexpected adverse event. You pay a certain amount as premium at fixed intervals and the insurance company gives you a specified amount in case you suffer an accident or theft.

What are the components of insurance?

There are three main components of an insurance policy: insurance premium, sum assured and deductibles.

The premium is the amount you would have to pay to an insurance company at regular intervals in order to keep the insurance contract in force. The payment could be made monthly, quarterly or annually. The premium amount varies based on what the insurance covers and the eligibility of the policyholder. Based on the premium paid, the company assures a certain amount as insurance cover in case there is an adverse incident.

The policy limit (or the sum assured) is the maximum amount you will receive as coverage from the insurance company. For example, if the policy limit on your health insurance is Rs 3 lakh and your hospital bill is higher, the insurance company will pay you Rs 3 lakh under the policy terms and you will have to pay for expenses beyond that. The policy limit is set based on the insurance premium, the kind of loss incurred and similar other factors.

A deductible is the amount or percentage that you will have to pay when there is an unfortunate event, before the insurance company pays the cover. The deductible helps the insurer avoid small and insignificant claims that people file under their insurance policies. If you choose a lower deductible, it means you will pay less when you file a claim, but such policies usually have higher premiums as the insurer will have to bear the cover.

What are the types of Insurance?

There are two main types of insurance--life insurance and general insurance--and each has several subtypes. To understand better let us dive into the details.

What is life insurance?

Life insurance provides a pre-defined sum of money to the family of the policyholder upon his/her death or after a fixed period (the point at which the policy matures). The person holding the insurance will nominate a person who would receive the money from the insurance company. The amount the insurer pays would help the family sail through financial difficulties when it has lost the breadwinner.

Types of life insurance:

Term insurance

Here, the nominee receives a fixed amount based on the premium paid, upon the death of the insured person during the policy term. But if the person survives the period of the insurance policy, he/she might not receive any maturity benefits. Term insurance is inexpensive compared to other life insurance and the premium rates are more affordable. Term insurance also covers critical illnesses where the insurance company pays a fixed amount for life-threatening ailments.

Endowment Policy

An endowment policy acts as life insurance as well as a savings instrument. If the policyholder dies within the insurance term, the nominee will receive the predefined sum of money. But if the policyholder survives the insurance period, he/she will receive the premium paid along with some return as per the terms of the policy.

Money-back policy

This insurance policy plays the dual role of investment plus a life insurance cover. The policyholder will receive a certain amount at fixed intervals under the policy term and also the nominee will receive maturity benefits in case the policyholder dies. On maturity of the policy, the holder receives maturity benefits along with a bonus under the terms of the insurance contract.

What is general insurance?

General insurance covers a wide range of non-life insurance including health, vehicle, house, travel etc. Here, an insurance company will cover the policyholder's expenses when an unforeseen incident occurs. The amount covered by the company will be set based on the premium chosen by the policyholder.

General insurance covers financial expenses such as:

Health insurance

Health insurance is vital in avoiding out-of-pocket expenses and helps pay hospital bills and expenses during a medical emergency. The amount payable by an insurance company is based on the premium amount paid by the policyholder and also depends on the list of illnesses covered under a certain health insurance plan. The older a person gets, the higher the premium charge. Health insurance policies often cover accidents but not self-inflicted damages such as an attempt to suicide.

Motor insurance

Motor insurance covers vehicles from accidents, theft, vandalism etc. The policyholder receives money from the insurance company to cover all the damages to the vehicle. Some motor insurances provide a cover to the third party during an accident where the insurer covers the third party in case of an accident from the policy holder’s vehicle.

Home insurance

As the name suggests, this insurance covers the damages caused to the policyholder’s home and belongings from several types of accidents. The policyholder can claim the insurance for damages from causes including, natural calamities, like floods, earthquakes, lighting etc and from man-made incidents like fire, destruction, theft etc.

Travel insurance

Travel insurance is important for those going abroad as it covers the policyholder in case of an emergency during travel like hospitalisation, loss of baggage, flight cancellation or delay, etc. Based on the kind of travel, one can choose either short-term or long travel insurance. Frequent flyers choose long travel insurance as it covers them over a longer period.

What are the benefits of insurance?

Risk management

Insurance reduces the financial burden on a policyholder and his/her family in case of an unfortunate event. The cover cushions a person with financial aid while sailing through difficult situations in life.

Savings

Several insurance policies promise a fixed return amount when the insurance matures, thereby it acts as a long-term saving to the policyholder.

Protecting loved ones

Insurance can help a family sail through financial needs upon the death of the breadwinner. The cover could aid the family in paying essential bills and avoiding financial dependence.