Insurance Policy: Meaning, Types and Importance

Be it for securing your new car, house, business or your own life, you may have often heard people advise you to get an insurance policy. Now, you may have wondered that if you handle everything perfectly, there may not be a need for an insurance. 

However, life is uncertain and thus having something to back you up always helps. Keep reading this blog to know how an insurance policy can be useful for you and your loved ones.

What Is an Insurance Policy?

An insurance policy is a legal contract between two parties, namely – a policyholder (insured) and an insurance provider (insurer). This agreement protects the holder from unpredictable contingencies by providing financial coverage in exchange for a premium.

So, you can consider an insurance policy as a backup plan that will provide you with funds to deal with a situation in case something goes wrong.  

How Do Insurance Policies Work?

When a contingency or unfavourable incident like damage of property or policyholder's death occurs, there can be a lot of expenses involved. Under such circumstances, you can raise a claim to your insurance provider in order to get financial aid. 

The insurer will assess the situation and then disburse a lump sum or reimbursement depending on the policy type and terms. 

Now, the contingencies covered, terms and conditions applicable, amount of money claimable, etc., are all mentioned in the policy contract. 

Regardless of the policy type, they all have three similar components:

• Policy Limit 

The policy limit is the maximum amount that an insurance provider will cover in case of a contingency. This factor depends on a lot of aspects like premiums, policy tenure, injury, loss and other factors. 

• Premium Amount

To get the policy benefits, you need to pay a premium. It is a sum of money that is payable annually, semi-annually, quarterly or monthly and is determined by the insurer based on policy limit, eligibility and type of insurance policy. 

• Deductible

A deductible is a minimum amount that you have to pay before the insurance provider settles your claim. To explain in simpler terms, the insurer will provide financial coverage only when you spend the above deductible amount. 

Let’s take an example for better understanding. Suppose you have a health insurance policy with a deductible of ₹40,000. Now, if you make a claim of ₹1,00,000, you have to spend the aforementioned amount before the policy provider steps in to fulfil your claim.  

Types of insurances available in India

There are several types ofinsurance policies available from different insurance providers. However, they can be broadly classified into 4 major categories:

1. Life insurance
2. Life insurance is a legal contract that provides compensation in the event of the policyholder’s death. The insurance provider pays a lump sum to the nominee as per the policy contract. The benefits and terms and conditions associated with a life insurance policy will differ among providers. 
3. These are some types of life insurance policies available in the market:
4. Term insurance plan
5. A term insurance plan provides financial coverage for a set number of years that can be determined while purchasing the policy. 
6. There are no maturity benefits for this policy and the sum assured is provided to the nominee in case of the policyholder's death during the policy period. 
7. There is a variant of the term insurance plan that returns all the premiums as a maturity amount if the policyholder survives the policy term.    
8. Whole life insurance
9. If you purchase a whole life insurance policy, you get financial coverage up to the age of 100. If you expire within this time period, your nominee will receive the death benefit. Alternatively, if you cross 100 years of age, you will get the maturity benefit. 
10. Furthermore, in case of most whole life insurance policies, you have to pay premiums for the first 10-15 years and get the policy benefits for your entire life.  
11. Retirement plans
12. Opting for retirement plans will enable you to get financial coverage along with retirement benefits during the vesting period. 
13. In case of your unfortunate demise during the policy period, your nominee will get the death benefits as well as the retirement benefits when the vesting period starts. 
14. Unit linked investment plans
15. Unit linked insurance plans (ULIPs) give you the benefit of both investment and an insurance plan. The premium you pay are allocated to a life insurance policy and a fund of your choice thus providing you with dual benefits. This is a long-term investment vehicle that has a 5-year lock-in. 
16. Additionally, the funds that you select can be debt, equity or a combination of both, based on your investment goals and risk appetite.  
17. Moneyback policy
18. It is a type of policy that promotes wealth creation over an extended period of time. Unlike other life insurance policies, you do not have to wait till the maturity date in order to get the sum assured. You receive a percentage of the maturity benefits throughout the policy period.  
19. Endowment policy
20. An endowment plan provides you with the benefits of life insurance and savings in one policy. It enables you to get life cover along with a lump sum maturity amount by saving on a daily basis. 
21. You get the maturity benefit if you survive the policy tenure and in case you, unfortunately, expire, the sum assured will go to your nominee.   
22. Group life insurance
23. Group life insurance policies are generally opted by companies for their employees. They are applicable for the coverage and benefits as long as they are part of the organisation. This policy provides coverage for the permanent disability or death of a member or both. 
24. Child insurance plans
25. A child insurance plan allows you to gain the dual benefits of insurance and insurance. It is a great way to ensure your child’s financial security even in your absence. In addition, it is an excellent way to save your funds to invest in your child’s future education plans or career.
26. Liability insurance
27. This type of insurance is applicable for financially protecting your liabilities. You can opt for it in case you are a self-employed individual, business owner or professional. It will financially compensate for losses due to injury or malpractices in your commercial property. 
28. Some of the common liability insurance policies are as follows:
29. • Commercial General Liability (CGL) Policy
    • Professional Indemnity Insurance
    • Directors and Officers Liability Insurance Plan
    • Commercial Crime Insurance Policy
    • Cyber Risk Insurance 
30. Motor insurance
31. If you are a vehicle owner, having a motor insurance policy is mandatory by law. This is to ensure your as well as others' safety when you are driving on the road. 
32. These plans generally come in two variants – third-party and comprehensive. The comprehensive motor insurance policy will cover financial losses for your vehicle as well as third parties in the event of an accident. The third-party motor insurance plan will only cover damage by your vehicle to third-party individuals, automobiles and property. 
33. Here are some of the common types of motor insurance available in India:
34. • Private Car Insurance Policy
    • Two-Wheeler Insurance Plan
    • Commercial Vehicle Insurance Policy 
35. Health Insurance

When you buy health insurance, you get coverage for the cost of medical treatment for you and the ones included in the policy. This compensation may include costs incurred for hospitalisation, medicine costs, daycare, pre- and post-hospitalisation, etc. They tend to differ among insurance providers. 

Furthermore, only a selected list of medical conditions is covered by the insurer. Thus, while purchasing a health insurance policy, you need to check the diseases covered in order to ensure that they will meet your needs. 

Health insurance policies generally provide cashless settlement or reimbursement.  

Listed below are some of the common types of health insurance policies that are provided by all providers:

• Individual Health Insurance (for individuals)
• Family Health Insurance (covering your entire family)
• Senior Citizen Health Insurance (if you are 65 or above)
• Critical Illness Insurance (for additional coverage in case of life-threatening diseases)
• Hospital Daily Cash (to manage the regular hospital bills)
• Top Up Health Insurance (for the times when the sum insured of your current policy gets exhausted)
• Mediclaim (for taking care of hospital bills)
• Group Health Insurance (for providing health insurance coverage to your employees)

What are add-ons and riders in insurance?

When purchasing an insurance policy, the insurer gives you the option to add riders. They are extra benefits that increase the coverage of your current insurance plan.  These add-ons come at extra charges but are really useful during times of need. 

They enable you to customise your insurance policy according to your need and are an affordable way to add the benefits of another insurance plan to your current one. 

The add-ons available with your insurance plan will differ based on the type of insurance policy and insurer. However, here are some of the common ones:

• Accidental Death Benefit Rider
• Family Income Benefit Rider
• Waiver of Premium Rider
• Critical Illness Rider

Tax Benefits on insurance policies

Buying an insurance policy also lets you avail tax benefits while filing your Income Tax Returns. They are as follows: As per Section 80C of the Income Tax Act, you can claim a maximum of ₹1.5 lakh tax deduction for paying life insurance premiums. However, there are some minimum policy holding periods for claiming this benefit, which have been discussed in the table below: Investment Type Minimum Holding Tenure Life Insurance Policy 2 years LIC or ULIP of UTI 5 years Post Office TimeDeposit and Senior Citizens Saving Scheme years According to Section 80D, there is a tax relief of ₹25,000 for medical insurance premiums. You can claim this benefit separately for yourself and your parents. Under Section 10(10D), the sum assured your nominee may get from your life insurance policy is exempted from taxation. As per Section 80C, there is a maximum deduction of ₹1.5 lakh available for paying the rider premiums.

Reasons why you should get an insurance policy

Here are the reasons why you should consider purchasing an insurance policy:

• Helps create a financial backing for adverse situations

Having an insurance policy will help you get financial coverage in adverse situations. Depending on the type of policy, you or your nominee can either get a lump sum or reimbursement to cover the costs to handle a contingency. 

Furthermore, an unfortunate incident generally comes with a lot of unforeseen expenses. Thus, having an insurance policy ensures that you do not need to break the bank for handling the situation. 

• Financially secures your family in your absence

If you are the sole earner of your family, your unfortunate demise can have a devastating effect on your loved ones. Under such circumstances, having an insurance plan will ensure that your family gets the necessary financial support to help them lead a normal life. 

Additionally, it helps secure the future of your child even when you are not there. 

• Protects your home financially in case of calamities

Calamities, whether natural or manmade, tend to come without warning and when they come, they destroy life and property. Now, under such circumstances, if you have an insurance policy protecting your home, you will get financial compensation for the damages, enabling you to fix up your house without straining your finances. 

Moreover, if you have the articles inside your house insured, you can purchase replacements with the insurance money.  

• Helps achieve long-term saving goals

One of the most significant advantages of having an insurance policy is that it assists you in fulfilling long-term saving goals. For example, insurance plans like ULIPs come with double benefits that provide you with life insurance as well as investment benefits. 

Conclusion

Plans like these help your money grow and you can use the maturity amount for many things such as buying a house, your child's education, starting your own business, etc. 

Also, if you are a young individual who has just started earning, an insurance plan can serve as an excellent method to grow your wealth in the long run. 

The benefits of buying an insurance policy far outweigh the cost that you have to bear in order to get one. Furthermore, the mental peace that you get knowing that you and your loved ones are financially secure is a bonus.