Insurance : Importance, Types and Benefits || Should You Insure First or Invest First ||

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 1. What is Insurance?

Insurance is a legal agreement between two parties i.e. the insurance company (insurer) and the individual (insured). In this, the insurance company promises to make good the losses of the insured on happening of the insured contingency. The contingency is the event which causes a loss. It can be the death of the policyholder or damage/destruction of the property. It’s called a contingency because there’s an uncertainty regarding happening of the event. The insured pays a premium in return for the promise made by the insurer.  

2. How does insurance work?

The insurer and the insured get a legal contract for the insurance, which is called the insurance policy. The insurance policy has details about the conditions and circumstances under which the insurance company will pay out the insurance amount to either the insured person or the nominees. Insurance is a way of protecting yourself and your family from a financial loss. Generally, the premium for a big insurance cover is much lesser in terms of money paid. The insurance company takes this risk of providing a high cover for a small premium because very few insured people actually end up claiming the insurance. This is why you get insurance for a big amount at a low price. Any individual or company can seek insurance from an insurance company, but the decision to provide insurance is at the discretion of the insurance company. The insurance company will evaluate the claim application to make a decision. Generally, insurance companies refuse to provide insurance to high-risk applicants.  

3. What are the types of insurance available in India?

Insurance in India can be broadly divided into three categories:

Life insurance

As the name suggests, life insurance is insurance on your life. You buy life insurance to make sure your dependents are financially secured in the event of your untimely demise. Life insurance is particularly important if you are the sole breadwinner for your family or if your family is heavily reliant on your income. Under life insurance, the policyholder’s family is financially compensated in case the policyholder expires during the term of the policy.  

Health insurance

Health insurance is bought to cover medical costs for expensive treatments. Different types of health insurance policies cover an array of diseases and ailments. You can buy a generic health insurance policy as well as policies for specific diseases. The premium paid towards a health insurance policy usually covers treatment, hospitalization and medication costs.  

Car insurance

In today’s world, a car insurance is an important policy for every car owner. This insurance protects you against any untoward incident like accidents. Some policies also compensate for damages to your car during natural calamities like floods or earthquakes. It also covers third-party liability where you have to pay damages to other vehicle owners.  

Education Insurance

The child education insurance is akin to a life insurance policy which has been specially designed as a saving tool. An education insurance can be a great way to provide a lump sum amount of money when your child reaches the age for higher education and gains entry into college (18 years and above). This fund can then be used to pay for your child’s higher education expenses. Under this insurance, the child is the life assured or the recipient of the funds, while the parent/legal guardian is the owner of the policy. You can estimate the amount of money that will go into funding your children’s higher education using Education Planning Calculator.  

Home insurance

We all dreaming of owning our own homes. Home insurance can help with covering loss or damage caused to your home due to accidents like fire and other natural calamities or perils. Home insurance covers other instances like lightning, earthquakes etc.  

4. What are the tax benefits on insurance?

Apart from the safety and security benefits of buying insurance, there are also the income tax benefits that you can avail.

• Life insurance premium of up to ₹1.5 lakh can be claimed as a tax-saving deduction under Section 80C
• Medical insurance premium of up to ₹25,000 for yourself and your family and ₹25,000 for your parents can be claimed as a tax-saving deduction under Section 80D

These claims have to be made at the time of e-filing income tax returns.  

Conclusion

Be it life insurance, health insurance or general insurance, you can buy an insurance policy offline as well as online. Just like there are insurance agents who will help you buy a policy, there are websites as well that you can buy a policy from. Ensure that you have done your research before choosing and investing in an insurance policy.

What Exactly is Insurance?

Insurance is an agreement between an individual (the person availing insurance) and an insurer (typically an entity). The insurer would provide the insured with financial protection against certain kinds of losses. The insurer assumes the risk in exchange for timely payments of premiums at predetermined dates. 

There are various kinds of insurance available for different assets. The most popular ones are health and term insurance. Health insurance is a kind of insurance that provides coverage to the insured against the probable medical expenses resulting from a health emergency leading to hospitalisation. 

Term insurance offers financial protection for the dependents of the insured when an untoward incident takes the life of the insured. In such cases, the term insurance policy pays out the policy’s sum assured to the term policy nominee. This is done in exchange for the annual premium payable by the insured.

What is Investing?

Investing is an act of using your money to purchase capital assets such as stocks, bonds, and so on, with the intent of generating a stream of income in the future. Some individuals invest in realising capital gains, which is the price difference in the cost of purchase and cost of selling. 

Investing is the only way of growing your money. Investing helps you achieve your financial goals sooner. Just saving money will not help you get rich. For that, you have to invest your money in suitable investment options.

Should You Insure First or Invest?

In this modern era of uncertainties, it has become essential to stay protected against all possible financial perils, which is beneficial for individuals and their dependents. Simultaneously, the ever-rising rate of inflation has made it extremely important for individuals to get started with their investment journey at the earliest. This is when the question of should you insure or invest first arise. 

Given that the right insurance policies protect you against possible financial losses arising due to unprecedented developments, it is of utmost importance to ensure first. With a term insurance policy, you get a high sum assured for the payment of a nominal annual premium. It gives you all the more reason to avail insurance before investing.

How Should You Go About Insurance?

The modern world is such that you are not sure of what will happen in the next minute. Medtech has evolved, so have the viruses and bacteria that cause diseases and infections. If you land on a hospital bed, you likely end up spending a fortune on clearing your medical bills. This has called for availing of the right health insurance policy.

A health insurance policy should provide sufficient medical cover for you and your family members. You have to ensure that the policy covers most of the diseases your family members are vulnerable to and has several hospitals under its network. Having the right health insurance policy keeps you away from settling hefty medical bills. Not to forget, the premium you will pay for the health insurance policy should be reasonable.

If you are the breadwinner in your family, and if an untoward incident results in your death, your family members will be left stranded with no income. To avoid such a scenario and protect your family’s future, you should avail a term life insurance policy. 

The premiums are affordable, and a term life policy provides a high sum assured, which would be enough to cover your family’s expenses and maintain their lifestyle that you are providing them. Term life insurance comes at a low premium if availed at a young age. Therefore, you have to avail a term life insurance at the earliest. 

How Should You Go About Investing?

Insuring before investing is always a good move. However, you should not delay investing. You have to start investing from a young age to realise higher gains over time. Yet, you have to be aware of the risk associated with your investments and should stay from those options whose risk levels are not matching your profile. 

If you are a risk-averse investor, you may consider investing in bank deposits (FDs and RDs), government savings schemes, bonds and debt mutual funds. If you are a slightly aggressive investor, you can invest in hybrid funds and equity-linked investments. If you are ready to take considerable risk in exchange for higher returns, you may invest in direct equities and equity mutual funds. 

Regardless of the investment option, you choose to invest in, you have to ensure that your objectives are being served and the risk levels of the investments are in sync with your risk tolerance level. 

Conclusion

Insuring and investing are two of the most important components of your financial plan. You must ensure before you start investing. However, you should delay your investments as inflation will eat into your savings, and the best way to accomplish your financial goals is by investing.