Insurance is a risk transfer mechanism ensuring full or at least partial financial compensation to the insured party against any loss or damage caused by the events beyond the control of individuals.
Primarily, insurance is used as a tool to hedge against the risk of financial losses.
Insurance is a contract which represents a policy where an individual or entity receives financial protection against losses or damages from an insurance company.
For making payments more affordable for the insured, the company pools the clients’ risks.
1. Policy Components
The three most important component of an insurance policy is premium, policy limit, and deductible.
Premium is typically expressed as payments at regular intervals like monthly, quarterly or annually. The premium is determined based on the risk profile of the insured which includes the creditworthiness, exposure to default, probable amount of loss, etc.
Policy Limit is the maximum amount that will be borne by the insurer in case of loss.
A higher policy limit may require a higher premium and a lower premium for a lower limit.
In case of a general life insurance policy, face value is the maximum amount that would be by the insurer to the beneficiaries upon the death of insured.
The specific amount that the policy-holder must pay as out-of-pocket expenses before receiving the claim from the insurer is referred to as the deductible.
High deductibles policies are less expensive because of fewer small claims due to high out-of-pocket expenses.
The amount of risk or liability that is covered for an individual or entity by way of insurance services is defined as insurance coverage.
Two basic insurance coverage provided is Auto Insurance and Life Insurance. The insurance premium is derived by multiple factors like the age of the individual, gender of the driver, age group, etc.
Auto Insurance Coverage
The premium of auto insurance is dependent on the insured party’s driving record.
There is a lower premium where a record is free of accidents and any traffic violations. A higher premium is charged to the drivers who have a record of previous accidents or serious traffic violations.
Similarly, novice drivers are more prone to accidents due to lack of experience and thus charged a higher premium. Typically the insurers charge more for drivers below the age of 25 years.
Other factors determining the premium include repair cost, the frequency of litigations, weather trends, and auto insurance fraud.
Life Insurance Coverage
Primarily, life insurance premiums are dependent upon the age of the insured individual.
Younger people and women are less likely to die early and thus pay a lower premium. Persons engaged in risky activities like car racing are required a pay a higher premium.
Also, the medical history of an individual determines the premium. History of diseases like heart disease or cancer or other chronic diseases requires a higher premium to be paid.
2. Types of Life Insurance
The most basic type of basic insurance is term insurance which provides life cover with no returns or savings component.
The premiums are relatively cheaper and than the most affordable types of life insurance.
Unit Linked Insurance Plan (ULIP)
A variant of endowment plan, ULIP pays the sum assured on death or maturity.
The performance of ULIP, unlike the endowment plan, is linked to the market performance.
Similar to mutual funds, the value of ULIP is captured in Net Asset Value (NAV). ULIP is a combination of investment and insurance.
Endowment plans pay out the sum assured under conditions of both, death and survival.
The endowment plans charge a higher fee for investing in equities or debt and pay out the principal (sum assured) along with profit on death or maturity.
Money Back Policy
The money back policy makes periodic payments over the life of the policy term.
This policy pays portions of sums, assured at regular intervals and the balance is assured at death or maturity.
In case of death, the sum is paid to the beneficiaries.
Whole Life Policy
The validity of a whole life policy is not defined, so the insured can enjoy the benefits of the life cover, throughout.
There is no pre-defined policy tenure. Also, the policy pays a regular premium until death, after which, a corpus amount is paid to the beneficiary.
3. Important Insurance Policies You Must Opt For
Out of the various options available in the market, few necessary policies that everyone should take are as follows:
Heath insurance is one of the most important policies an individual should opt for. While opting for health insurance, one must consider the following things:
You must always take affordability into consideration. That way, the premium you would have to pay would be lesser.
Aged people need more coverage than the younger ones. Hence, you must look at your needs as well.
Life insurance is an important component for self and protection of the family, in case of death before time.
Life insurance will help the family to offset the loss or expense in case an individual being the only bread earner of the family. The single individual may not opt for a life insurance but every individual in a family invest in a life insurance policy
Almost every state or individual with possession of a vehicle would require. Also possessing a car of higher value, an individual would also require to insure it against theft. The primary types of car insurance are:
- Personal Injury Infection
- Uninsured or Underinsured Motorist
Five Not So Important Insurance Policies
There are some policies which may not prove to be essential to everyone and are customized only for a few. They include:
- Flight Insurance
- Disease Insurance
- Accidental Death Insurance
- Mortgage Life Insurance
Disclaimer: The views expressed in this post are that of the author and not those of Groww