All of us want financial security for ourselves and our family. It is important for you, as an investor, to safeguard yourself, your family and your assets from a slew of risks and a variety of accidents that may affect you at any time. Yet many of us don’t plan about insurance. More often than not, we don’t think of risks and for the unexpected to happen (assuming they’re unexpected after all!) so we leave things to chance. Are you ready to take that chance? Are you prepared for such contingencies? Ignorance of insurance and assuming it to be too complicated to pay attention to and not having a proper financial plan will have a very adverse effect. So let’s get into the basics of Insurance to make it simpler for us to understand and make the right choices.

 Procuring comprehensive insurance is the best way to deal with these situations.. It allows you to transfer this liability to an insurance company that can secure your finances in the event of a calamity. So to start, here are the 5 things you need to know about Insurance that will help you make a correct financial decision

1.What is insurance and how can you possess one?

Insurance is a tool to reduce financial loss or hardship. It is a legal contract (insurance policy) between an insurance company (insurer) and an individual (insured) to make good on the losses of the insured if an insured contingency occurs. It is the protection that can help cover you against contingencies such as the death of policyholder, theft, illness, property damage which can be your house property / Business. The contingencies for which you are insuring yourself are explicitly stated in your insurance policy. The protection or coverage you receive can be for a limited period or throughout your lifetime. To have the protection coverage, you need to pay a premium which is an amount paid periodically, depending on the type of insurance taken and what is stated in your policy. The number of premiums you pay is based on the probability that you will suffer a claimable loss. Other factors that are considered in computing premiums can be the insured’s age, health, lifestyle or family history.

2.Common terminologies:

Before we proceed to see how insurance works, here are some of the common terms you will come across when dealing with insurance:

• Premium – Periodic payment made by the insured to the insurer to cover future claims.
• Deductible – The amount the insured pays before costs are shared by the insurer.
• Liability limit – Upper limit covered by the insurer for a given contingency.
• Annual/Lifetime Limit – The upper limit covered by the insurer in a given year, and subsequently for the full-time period of the policy.
• Surcharge – Extra cost added to basic premium in the case of increased risk owing to the insured individual’s actions, eg. traffic violations, smoking, etc.

3. How does insurance work? 

Insurance companies collect premiums from their clients- the policyholders. These collections are then pooled together, to pay for damages of the individuals it insures. Insurance companies continue to thrive because more often than not, there are very few people who end up claiming the insurance. It is also for this reason that your policy can promise a big payout for small premiums. 

4.Types of insurance policies: 

In India, insurance policies can be broadly categorized into two types:

1. Life insurance: Life insurance policies cover individuals against their untimely demise. In these policies, the insurance company pays the policyholder’s beneficiaries a predetermined sum. Life insurance policies can either be life-long or taken out for a specific time. Few variants in Life Insurance are Whole Life Plan, Term Plan, ULIPs, Endowment Plans.
2. General insurance: General insurance is insurance for valuables other than our life. It covers the insured against damage, loss, and theft of your valuables. The premium and cover of general insurance depend upon the type and extent of insurance. The policy typically has a period of a few years. In India, general insurance policies are Health Insurance, Motor Insurance, Home Insurance, Travel Insurance, Marine Insurance, Commercial Insurance, Rural Insurance, Crop Insurance.

These policies are for shorter durations of usually a year, but policyholders can renew them.

5.Tax benefits of purchasing insurance:

Apart from guaranteeing safety and security to you, your family and your assets, buying insurance also have certain income tax benefits that you can avail. They are,

• As detailed under section 80C of the income tax act, life insurance premiums of up to INR 1,50,000 can be claimed as a tax-saving deduction.
• Similarly, section 80D prescribes that medical insurance premiums of up to INR 25,000 for you and your family and an additional amount of INR 25,000 for your parents can be claimed as a tax-saving deduction.

These can be claimed when you make your ITR submission. Your chartered accountant will help you identify all the deductibles that apply to you efficiently.

Now that you have a general understanding of what insurance is, you can be more confident when you choose your policies. Then, the next step is to procure the policies that you need. Buying a policy can be done through an agent in-person, or online through a website. A certified financial planner can help you immensely when it comes to shortlisting insurance options for your financial plan.