What is Insurance and how does it work?
Insurance is a tool to safeguard our future and our family’s future. It is compensation of financial loss on the happening of an uncertain event. Insurance works on Risk Sharing methodology. Eg: if there is a village, which has 400 houses each valued at 20,000. Every year there is a probability of approx. 4 houses getting burnt resulting into a total loss of Rs. 80,000. Now, how insurance will work is – An Insurance Company will collect a fund of Rs. 200 from each house owner as the premium of the insurance and collect a total of 80,000 in the bargain. If in this year as well, the total number of houses remains the same 4, then the insurance company quickly removes the collected money and fund for the 4 houses’ repair and damage control thus resulting in a total spends of 80,000 which has been collected as a premium. This way, by paying a small amount towards premium the people of the village are sharing the risk of their houses getting burnt and every year they get compensated by the Insurance they have paid. Now, the Risk of 4 house owners is been shared with 400 house owners.
In simple terms, Insurance has two fundamental characteristics:
- Transferring or shifting of a risk from one individual to a group of individuals
- Sharing losses, on some equitable basis, by all members of the group
Insurance is a contract between two or more parties to do or to abstain from doing an act and which is intended to create a legally binding relationship.
Essentials of the valid contract:
- Free Consent – That the person opting for the insurance should be willingly going for the Insurance
- Lawful Consideration: that the contract should be legally binding under the guidelines mentioned
- Offer and Acceptance: That the insurance provider has the right to Accept or Reject the Policy proposal
- Lawful Objective: that the objective of taking the insurance should be clearly and transparently taken
- Two or more Parties: that an insurance will always be between two parties at least – the Insurer and the Insuree.
Why do you think Insurance is essential?
Our life is a ticking time bomb. We are continuously under tremendous amount of stress and pressure. Long working hours, Irregular eating habits, Bad eating habits, No Exercise, Excessive drinking could be some of the reasons why the stress level is so high. Life is full of uncertainties; anything can happen anytime – Accident, Natural Calamities, Death or Permanent disability. Then what will happen to our family and our children; who will take care of them and their needs? Who would support our family if a sudden disability or illness puts us out of action & we are unable to earn for a while? Who would take care of all the medical expenses? Who would pay the household bills? From whom would we get the money to face the crisis? Who would pay for our children’s education, their marriage? Who would take care of our family?
These are all the “Who” questions of our life and Insurance is the only answer for all these questions. Since we have no control over life’s ups and downs, why not do something over which we do have control – plan for uncertainties. Insurance is the best choice in all these situations; rather than planning to sell of your assets like gold or property, rather than taking off your much saved Fixed Deposit which you had saved for later; it is advisable to have an Insurance which can fund instantly for any such u unforeseen situations. Many financial experts consider life insurance to be the cornerstone of sound financial planning.
So, let’s see what types of insurances are available and what is the difference
Life Insurance policies are categorized into 3 major segments:
- Traditional Plans: Endowment plans
- Protection plan: Term Plans
- ULIP (Unit Linked Insurance Plan)
Lets see what each of them have to offer:
- Term Plan: These are generally pure life insurance plans. A term insurance policy is a traditional way of securing life by paying a small premium and just securing the life cover; it does not provide any returns. It simply provides life cover or risk cover for a specified time period. Eg: if a person takes a term plan worth 1 Crore for 20 years, and if something happens to him within these 20 years, his family is entitled to get the entire Sum Assured of 1 Crore
- But what happens if he survives the 20-year term:Well, then there is no entitlement of any payment; the insurance company will forfeit the entire premium that was paid during these 20-year period. There is no scope of savings or investment in a pure term plan. It is a 100 per cent risk cover policy. It simply means that an individual pays a certain premium (which is generally much lower than normal policies) to protect his family against his sudden death. He doesn’t get any amount if he crosses term and survives even after that. This is precisely why the Term Insurance Policy comes at such a lowest cost because it only secures life.
- Endowment Plan: Combining risk cover with financial savings, endowment policies are the most popular policies in the world of life insurance. A plan in which the amount is paid to a policyholder if he outlives the tenure of the policy or to his nominee if the insured person dies before the date on which the policy matures. This is the most sellable product in the Insurance Industry as it offers security as well as savings. If there is a sudden miss happening, then the family gets the Insurance cover and if the policy matures w=till the end, the policy holder gets the maturity value.
- Unit Linked :- Unit linked Insurance Plans ( ULIP ) are those plans that gives you the benefit of both Insurance and Investments at one step that too with the help of Professional Fund Managers. These policies are generally invested in the Stock market and whatever is the result of the market, depending on that, these policies will either be beneficial to the customer or at loss.
Conclusion: Hence, Insurance is a very critical element of all our lives and if we really wish to safeguard the future of our loved ones, we should definitely apply for insurance right away. This will only give us mental satisfaction that our family is secure even after us.