Insurance

What is an insurance?

An insurance is an official contract between two entities, the one who seeks an insurance (insured) and the one who provides an insurance (insurer). The insurer promises to provide financial protection to the insured in case of an event which is stated in the contract. In exchange for the financial protection, the insured pays a certain sum (premium) to the insurer every month.

How does it work?

Lets say you bought a brand new car and want to get it insured (just in case you get in an accident). For this, you'll need to go to an insurance broker or an insurer. The insurer will underwrite your insurance policy. 

Now, what is underwriting? Underwriting is a process of analyzing and assessing the risks involved in order to come up with the best possible policy for the insured. In this case, they may check your driving history, the value of your asset (car), the daily routes you take, etc. to assess the probability of a mishap.

The insurer then drafts a policy with a defined premium which needs to be paid by the insured every month. The amount of premium to be paid every month is dependent upon the risks involved. Higher the risks, higher the premium (usually).

An insurance policy will contain details of the insurer, the insured, the beneficiary, the sum insured, the co-payment and the deductibles. Let us understand what these terms mean.

• Beneficiary: It is the person upon whom the insured would like to bestow the proceedings of the insurance in case of the death of the insured.
• Sum insured: It is the maximum amount of money the insurer can annually provide the insured. If the insured requires more money than the sum insured, they'll have to pay it out of their own pocket.
• Deductibles: It is the amount of money or portion of the loss which the insured needs to pay out of their own pocket before the insurer starts paying for their bills.
• Claim money: It is the balance remaining after the deductibles are subtracted from a bill.
• Co-payment: It is the amount of claim money (percentage) the insured will have to pay before the insurer pays for the rest. For example, most health insurers pay 80% of the total costs borne by the insured. The remaining 20% has to be paid by the insured.

If the insured event ever takes place, you'll have to make a claim, only then will your financial losses be compensated. However, if you fail to make the claim within the time period mentioned in the policy, you'll receive no financial aid form the insurer.

Let us take another example to have a clearer understanding of the terms. Lets say you get hospitalized and undergo a surgery which costs ₹1,00,000. You make a claim for financial aid against your health insurance policy which has ₹5,000 as deductibles and a 20% co-payment. You'll need to pay the first ₹5,000 as deductibles before the insurer can start paying your bill.

Once you've paid the first ₹5,000 the insurer will then pay a percentage of the remaining balance (usually 80% in case of health insurance). The rest will, again, need to be paid by you. This means that the insurer will pay a total of ₹76,000 and you'll pay a total of ₹24,000 (₹5,000 deductibles and the remaining 20% as co-payment).

Note that the terms explained above are some of the basic terms used in a policy. A policy may have a definitions section where you can find the above as well as any additional definitions regarding the policy. Be sure to understand the meaning of all terms in your policy before accepting one. You can always ask your insurer to provide more clarity.

Types of Insurances

Insurance policies can be broadly divided into two categories:

1. Life Insurance
2. General Insurance

Life Insurance

A life insurance covers the risk of death of the insured. Upon the death of the insured, the beneficiary receives a sum of money to help ease the financial hardships caused due to the death of the insured. Some variants of a life insurance plan are:

• Term Insurance Plan
• Endowment Plan
• Pension Plan
• Whole Life Insurance Plan
• Unit Linked Insurance Plan

Here is a link which explains some of the above variants.

General Insurance

General insurance covers the loss of an asset or of the things which a person value. It protects the insured from any financial liability in case of loss a certain asset. A few types of general insurances are mentioned below:

1. Home Insurance
2. Motor Insurance
3. Fire Insurance
4. Health Insurance
5. Travel Insurance

Here is a link which explains a few types of general insurances in detail.

Disclaimer:

1) This blog post provides personal finance educational information, and it is not intended to provide legal, financial, tax or any type of official advice.

2) None of the images used in this post are owned by me. They belong to their respective copyright holders.