What is Insurance? Its History, Definition, Types, & Components

The Oriental Life Insurance Company was established in Kolkata in 1818 by pioneering British merchants, laying the groundwork for insurance in India. This watershed moment signaled the commencement of formal insurance, which provided a financial safety net. As time passed, the notion persisted, giving rise to a slew of insurance businesses through future innovations. This industry is now a living tribute to those early visionaries’ foresight, having shaped the insurance landscape and providing critical security to individuals and businesses across India.

An insurance setup, as specified in a policy, provides individuals with financial protection or compensation for losses from an insurance firm. The company consolidates the risks of its policyholders to make payments more cheap for the insured. Many people have insurance, whether for their car, home, health, or life.

Insurance policies protect against financial setbacks caused by accidents, physical harm, or property loss. Insurance also helps to cover the costs associated with legal liabilities for third-party damage or injury.

Understanding the Importance of Insurance

Insurance’s importance should never be underestimated. Insurance serves as a critical barrier against unforeseen circumstances. It protects you against unexpected expenses and provides a financial cushion in the event of an accident, illness, or other calamity. Insurance protects your family’s financial interests while you’re away. It helps individuals handle urgent needs while also ensuring their long-term financial security.

1. 1. Ensures financial security: Insurance is an absolute necessity. Insurance gives families’ financial stability and helps them afford expenses such as education, loans, housing, groceries, and more. It also ensures financial stability during unexpected situations and assists with covering medical expenditures, property damage, and other related charges.
   2. Encourages personal economic growth: Insurance stimulates personal economic growth by allowing surviving family members to achieve their goals in the absence of the policyholder. It provides a safety net to ensure that your loved ones have access to critical resources like education. Your loved ones can also utilize the insurance payout to enhance their financial status, such as investing in enterprises or buying real estate.
   3. Builds long-term wealth: Endowment, money-back, and Unit-Linked Insurance Plans (ULIPs) are types of insurance policies that give wealth accumulation chances by extending savings and investing alternatives for retirement and child education. These policies provide long-term savings and investing opportunities, allowing you to protect your financial future.
   4. Assists families during medical emergencies: In today’s world, medical expenses are increasing due to inflation and increasing illnesses. Therefore, having a robust health insurance policy is crucial. It offers financial protection against medical costs, provides an affordable solution with high sum assured policies, and ensures access to quality healthcare services in your time of need.
   5. Offers tax benefits: Life insurance allows you to plan for the future while also saving taxes* in the present. Premiums paid under the policy are eligible for tax deductions of up to ₹1.5 lakh per year, subject to Section 80C of the Income Tax Act, 1961. You can save up to 46,800/- in taxes* annually.
   6. Ideal for retirement planning: Life insurance might help you maintain financial independence even after you retire. Life insurance policies, such as annuities, provide you with a fixed income for the rest of your life. They are low-risk plans that help you maintain your current lifestyle, pay for medical bills, and accomplish your post-retirement goals.

Varieties of Insurance Coverage available in India

There are various sorts of insurance. Let us look at the most significant.

1. General Insurance

These plans are one type of policy that provides coverage in the form of a sum insured for damages other than the policyholder’s death. In general, general insurance refers to a wide range of insurance products that provide financial protection against losses caused by liabilities such as a bike, car, home, or health. Here are some examples of general insurance policies

• Health insurance: This is acquired to cover medical expenses associated with various health concerns, such as hospitalization, therapies, and so on. These insurance policies come in useful in case of medical crises; you can also avail of cashless facilities throughout the insurer’s network hospitals.
• Auto Insurance: These are vehicle insurance plans that cover automobiles and motorcycles. These protect against natural disasters, damages to third parties (those who have experienced losses or been harmed in an accident with the policyholder’s car), and also damage to the vehicle, as well as mishaps and accidents.
• Travel insurance: It is a sort of insurance coverage that is intended to give financial protection and support for unexpected occurrences that may occur during a trip. It often covers a wide range of eventualities, such as trip postponements, illnesses, lost luggage, trip delays, and other unanticipated incidents that could impair travel plans. Travel insurance reduces financial risks and assists in emergencies while away from home. Coverage and benefits vary based on the policy and provider.
• Home insurance: It is a type of property insurance that covers a private home. It often covers the physical construction of the home, personal possessions inside the home, and liability coverage for accidents that may occur on the property.
• Marine Insurance: Marine insurance is an agreement between the insured and the insurer. Marine insurance protects against sea-related risks. Dangers at sea include ship collisions with rocks in the sea, pirate attacks on the ship, and ship fires. Marine insurance includes three categories of insurance: ship hull, cargo, and freight insurance.
• Fire Insurance: Fire insurance is a sort of general insurance policy in which the insurer assists in paying for any damage caused to the insured by an unintentional fire for the defined amount of time as stated in the insurance policy. Generally, fire insurance coverage is good for one year and can be renewed each year by paying a premium, which can be paid in full or in installments.

2. Life Insurance

Life insurance policies safeguard against unexpected occurrences, such as the policyholder’s death or disability. Apart from offering monetary safety, many life insurance plans permit policyholders to maximize their savings by making monthly contributions to a variety of equity and debt fund options.

• Term insurance: It is the most basic and least expensive type of life insurance, allowing you to select a high level of coverage for a specific period. You can protect your family’s financial future by purchasing a low-cost term life insurance policy.
• Whole life insurance plans: It is often known as ‘conventional’ life insurance plans, and provide coverage for the policyholder’s whole life (usually until age 100), as opposed to any other type of life insurance that only covers a certain number of years. A whole life insurance policy provides death benefits, however, it also features an element of savings which lets the policy accrue cash value over time. Whole life insurance has a 100-year maturity period. If the insured lives over the maturity age, the entire life insurance policy becomes a matured endowment.
• ULIPs: These are insurance policies that combine investing and insurance benefits under one contract. A portion of your Unit Linked Insurance Plan payment is invested in various market-linked equities and debt instruments. The remaining premium is utilized to provide life insurance coverage for the remainder of the term. ULIPs allow you to allocate premiums to various products based on your financial needs and market risk tolerance.
• A retirement plan: It is a long-term investment tool that helps you to save a large amount of money to meet your financial demands during your retirement years. Guaranteed plans are typically related to such a goal and can help you save enough assets to last through your retirement years. When you reach maturity, you have the option of receiving a regular income stream or a lump sum payment.
• Endowment Plans: Endowment plans provide financial security against life’s uncertainties while also allowing policyholders to save consistently over a certain period. If the policyholder lives beyond the insurance term, the endowment plan matures and the policyholder receives a lump sum payment. If something happens to you (as the life insured), the life insurance endowment policy pays your family (beneficiaries) the entire sum insured.

Understanding The Components

Premium: The premium for an insurance policy is the amount you must pay to acquire a specific amount of coverage. It is sometimes referred to as a recurring price that you pay in one large sum or on a monthly, quarterly, semi-annual, or annual basis during the premium payment term. An insurance company decides an insurance plan’s premium based on several parameters. The purpose is to assess whether an insured individual is qualified for the insurance plan he or she want to acquire.

Policy Limit: It refers to the maximum sum for which an insurance company is liable for losses covered by the policy. It is determined using the insurance term, loss or damage, and other similar parameters. Typically, the larger the policy limit, the higher the premium. The sum assured is the most an insurer will pay to the nominee under a life insurance policy.

Deductible: The deductible is the amount or percentage that the insured chooses to pay out of pocket before the insurer pays the claim.  The insurance company is only required to pay the claim amount if it exceeds the deductible. Deductibles are defined by the terms of a certain type of policy and apply per policy or claim. In general, insurance policies with high deductibles are less expensive since fewer claims are filed due to the higher out-of-pocket expenses.

How does it work?

As previously stated, an insurance policy is a legal contract between the insured and the insurance provider. It includes all of the terms and circumstances under which the insured person or policy nominee receives insurance benefits from the provider.

Insurance is a way for you to protect yourself and your family in the event of a financial disaster. You buy an insurance policy for it, and the insurance company bears the risk and offers insurance coverage at a certain cost.

In the event of an unforeseen incident, the insured or nominee can file a claim with the insurance company. The insurer reviews and covers the claim based on the claim criteria.

Insurance is essential in today’s world, offering numerous advantages such as securing financial futures for oneself and family and encouraging regular savings habits. Life insurance, for example, is a popular choice, enabling individuals to build a substantial corpus and protect their financial future.

SMIFS Finance offers term and health insurance plans to protect your financial standing and earn additional benefits. Understanding insurance basics is crucial for choosing the right plan to ensure your safety and security.