Planning to buy an insurance policy? Here is what you need to know
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 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.
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 benefits of insurance?
Risk managementInsurance 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.
SavingsSeveral insurance policies promise a fixed return amount when the insurance matures, thereby it acts as a long-term saving to the policyholder.
Protecting loved onesInsurance 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.