The Beginner’s Guide to Insurance

Having the right kind of insurance is central to sound financial planning. Some of us might have some form of insurance but very few actually understand what it is or why one particular must have it. For most Indians insurance is a form of investment or a superb tax saving avenue. Ask a typical person about his/her investments and they will proudly mention an insurance product as part of their core investments. From the approximately 5% of Indians that are insured the proportion of those effectively insured is much lower. Very few from the insured view insurance as purely that. There is perhaps no other financial product that has witnessed such widespread mis-selling at the hands of agents who are more than enthusiastic in selling products linking insurance to investment earning them fat commissions.

What is Insurance?

Insurance is a way of spreading out significant monetary risk of a person or business entity to a large group of individuals or business entities in the event of an unfortunate event that is predetermined. The cost of being insured is the month-to-month or annual compensation paid towards the insurance company. In the purest form of insurance if the predefined event does not take place until the period specified the money compensated as compensation is not retrieved. Insurance plan is effectively a means of spreading risk among a pool of individuals who are insured and lighten their particular financial burden in the event of a shock.

Covered and Insurer

When you seek defense against financial risk and create a contract with an insurance provider you become the particular insured and the insurance company becomes your own insurer.

Sum assured

In Life Insurance policy this is the amount of money the insurer promises to pay when the insured dies before the predefined time. This does not include bonuses added in case of non-term insurance. In non-life insurance this assured amount may be called as Protection plans.


For the protection against financial risk an insurer provides, the insured must pay compensation. This really is known as premium. They may be paid each year, quarterly, monthly or as chose in the contract. Total amount of rates paid is several times lesser than the insurance cover or it wouldn’t make much sense to seek insurance in any way. Factors that determine premium would be the cover, number of years for which insurance is sought, age of the insured (individual, vehicle, etc), to name a few.


The beneficiary who is specified by the insured to receive the sum confident and other benefits, if any may be the nominee. In case of life insurance it must be another person apart from the insured.

Policy Term

The number of years you want protection for may be the term of policy. Term is decided by the insured at the time of purchasing the insurance policy.


Certain insurance policies may offer additional features as add-ons in addition to the actual cover. These can be utilized by paying extra premiums. In case those features were to be bought separately they would be more expensive. For example you could add on a personal accident driver with your life insurance.

Surrender Value plus Paid-up Value

If you want to exit an insurance policy before its term ends you can discontinue it and take back your money. The amount the insurer will pay you in this instance is called the surrender value. The policy ceases to can be found. Instead if you just stop spending the premiums mid way yet do not withdraw money the amount is called as paid-up. At the term’s finish the insurer pays you in proportion of the paid-up value.

Now that you understand the terms this is how insurance works in plain words. An insurance provider pools premiums from a large group of people who want to insure against a certain kind of loss. With the help of its actuaries the business comes up with statistical analysis of the possibility of actual loss happening inside a certain number of people and fixes rates taking into account other factors as mentioned earlier. Functions on the fact that not all insured will suffer loss at the same time and many may not experience the loss at all within the time of agreement.

Types of Insurance

Potentially any danger that can be quantified in terms of money can be insured. To protect loved ones from lack of income due to immature death you can have a life insurance policy. To protect yourself and your family against unforeseen medical expenses you can opt for a Mediclaim policy. To protect your vehicle against robbery or harm in accidents you can have an electric motor insurance policy. To protect your home against fraud, damage due to fire, flood as well as other perils you can choose a home insurance plan.

Most popular insurance forms in Indian are life insurance, health insurance and motor insurance. Apart from these there are other types as well which are discussed in brief in the following paragraphs. The insurance sector is regulated plus monitored by IRDA (Insurance Regulatory and Development Authority).

Life Insurance

This type of insurance provides cover towards financial risk in the event of premature passing away of the insured. There are 24 life insurance coverage companies playing in this arena of which Life Insurance Corporation of India is a public sector company. There are several forms of life insurance policies the simplest form of that is term plan. The other complex policies are endowment plan, whole life program, money back plan, ULIPs and annuities.

General Insurance

All other insurance policies apart from Life Insurance fall under General Insurance. There are 24 general insurance companies in Indian of which 4 namely National Insurance Company Ltd, New India Assurance Organization Ltd, Oriental Insurance Company Ltd plus United India Insurance Company Ltd are in the public sector domain.

The biggest cake of non-life insurance in terms of monthly premiums underwritten is shared by electric motor insurance followed by engineering insurance plus health insurance. Other forms of insurance offered by companies in India are home insurance, travel insurance, personal accident insurance plan, and business insurance.

Buying Insurance policy

There are an umpteen number of procedures to choose from. Because we cannot foresee our future and stop unpleasant items from happening, having an insurance policy is a necessity.
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But you need to choose carefully. Don’t simply go with what the real estate agent tells you. Read policy documents to know what is covered, what features can be found and what events are excluded from being insured.

1 . Know your Needs

Determine what asset or incident should be protected against loss/damage. Is it a person life, health, vehicle, home? Following determine what kinds of damage or risk exactly would the assets be most probably be exposed to. This will tell you exactly what features you should be looking for in a policy. Of course there will be losses which cannot be foreseen and the cost of dealing with all of them can be very high. For instance nobody can predict that they’ll never suffer from crucial illnesses no matter if they’re perfectly healthy at present.

The biggest mistake while it comes to purchasing insurance, particularly life insurance is to view it as an investment. Clubbing insurance and investment in a single product is a poor concept. You lose out on both fronts mainly because for the premiums you’re paying a lot more cover could’ve been got within a term plan and if the premiums were invested in better instruments your returns could’ve been several times more.

Be wary of agents who want to speak you into buying unnecessary plans like child life insurance, credit card insurance coverage, unemployment insurance and so on. Instead of purchasing separate insurance for specific possessions or incidents look for policies that will cover a host of possible events under the same cover. Whenever possible choose bikers that make sense instead of buying them separately. Unless there is a fair chance of an event happening you do not need insurance for it. For instance unless you are very prone to mishaps and disability due to your nature of work or other reasons you no longer need an Accident Insurance policy. A good Life Insurance policy with accidental death rider or waiver of premium rider or an impairment income rider will do the job.

second . Understand Product Features and Costs

The worst way of choosing an insurance product or insurer is to blindly follow the recommendation of an broker or a friend. The good way to get it done is to shop around for products that will suit your need and filter out the ones offering lower premiums intended for similar terms like age, quantity of cover, etc . All details you require about the product features and costs will be provided on the company’s web site. Many insurance policies can now be bought on the web. Buying online is smarter due to the fact premiums are lower due to reduction of agent fees. If purchasing offline in case of life insurance, tell the agent that you’re interested only within term insurance.