Importance Of Insurance - Insurance Needs And Types

 

In this policy, the investment risks in the investment portfolio is borne by the policyholder

The basic thumb rule of any business is that the higher the risk, the higher the reward. Though it is correct, risk can also cause loss, instability or stress.

Life is uncertain. Unforeseen or unfortunate circumstances can lead to financial loss. In a business, unexpected situations can lead to theft, loss or damage of goods. Hence, knowing the importance of insurance is important from a business perspective.

In a person’s life, risk can lead to loss of employment, family suffering, hospitalisation, etc. This can cause stress to you, your loved ones and your bank accounts, underscoring the importance of insurance.

Here’s when insurance steps in. Insurance can not avoid risk; rather, it helps you reduce risks by transferring them to the insurance company. The advantages of insurance are endless.

Why is Insurance Important?

Be it a business or the personal life of a person, the need for insurance, particularly life insurance plans, plays a vital role in mitigating risk and reducing financial losses. It helps assess, manage, reduce and transfer risk to the insurer. Let’s discuss the benefits of insurance or the importance of insurance in detail.

Helps Economic Growth

People and businesses pay premiums to get themselves insured. These premiums are pooled, and then a certain percentage is invested further.

The money is usually further invested in low-risk, long-term investments such as government securities that come with steady returns. In such ways, the government can fund large infrastructural and other projects which further help in the nation's economic growth.

Generates Long-Term Wealth

Let’s consider an example of life insurance. You pay premiums in exchange for maturity or death benefits. The yearly premiums are affordable, but when they get pooled or accumulated over time, it helps in wealth generation. Upon the policy’s maturity or the insured’s death, these funds are handed over to him or his nominees.

Provides tax benefits

The premiums you pay and the sum assured you get help to reduce your tax liability in the present and future. This is generally applicable in life insurance.

Various sections of the Income Tax Act 1961², like Section 80C and Section 10 (10D), allow tax deductions on life insurance premium payments and payouts. These tax deductions may vary from one policy to another. Hence, it is a great financial tool as well.

Supports Families in Medical Emergencies

Uncertainties of life can lead to hospitalisation, and big medical bills can make a hole in your pocket. This often leads to stress and adds to your loved ones’ burden.

In such cases, health insurance is a way to go. While you take care of yourself or your family, insurance companies take care of your bills. Recovery becomes easy when finances are taken care of.

Need for Insurance

We often hear people discuss the importance of insurance and how it is no longer an option. But no one really explains why. So, let's discuss why you really need an insurance policy.

Life insurance for future goal planning

Everyone wants their future to be secured and finances to be sorted. This is where the right life insurance plans can help you. In exchange for premiums, it enables you to build a corpus. Your investment helps you in the future or takes care of your family upon your demise. It may also help you live a comfortable life in your retirement years. You may use it to buy a home, plan for your children's wedding or start a new venture. That's how life insurance helps in planning for your future.

Insurance for financial security

Insurance provides a safety net against the unexpected and thus acts as a security tool. Whether it’s loss of goods, theft, fire, medical emergencies, loss of immovable property, critical illness or loss of employment, insurance covers all and any kind of risk.

It reduces the overall financial burden of families, leaving them stress-free. It safeguards an individual's financial well-being and provides protection by mitigating risks.

Retirement planning

Gone are the days when jobs were considered to be secured as they came with the benefit of pensions. In today's world, retirement planning is essential regardless of whether you are employed or running a business.

In such cases, insurance comes for the win. It helps you build a corpus with affordable premiums for over 25, 30, or more years. The accumulation of wealth leads to the creation of a retirement corpus that supports you in your post-retirement years.

It helps you pay your bills, take care of hospitalisation expenses or fund your child’s marriage. Hence, it makes your retirement life a smooth journey.

Provide post-retirement income

As discussed above, insurance takes care of your well-being in your old age. It helps you pay your bills and take care of your spouse as well.

Pension plans ensure that you have a regular income even if you are not working in your old age. A regular income takes care of your well-being and contributes to a financially secure future. You can also opt for deferred annuity plans that will help you get the pension at a later stage.

Types Of Insurance

By now, you already know the importance and need of getting insurance. Let’s discuss the types of insurance policies available for different circumstances/needs.

Life insurance

Life insurance is where you pay premiums to insure your life. In exchange for your premiums, the insurance company provides a maturity benefit/death benefit. It offers two benefits: insurance and wealth creation.

In case of your demise, the sum assured is paid to your beneficiaries or nominees. If you outlive the plan, the maturity amount is given to you. You can also add riders¹  to the policy to increase the coverage.

For example, adding a critical illness rider¹ will take care of your finances if you are diagnosed with any critical illness while your policy is active.

Child insurance plan

A child insurance plan is specifically dedicated to your child’s needs. Its main aim is to provide insurance and act as an investment for children's financial security.

The funds accumulated can be utilised towards the child's future education or marriage or even buying them their favourite instruments.

Term insurance plan

It is a pure insurance plan that only provides insurance for a specific term, depending on your needs/requirements. Most term insurance plans in India offer death benefits only. If the insured dies while the policy is active, the nominees would get the sum assured.

If the insured outlives the policy, no maturity benefit is given, and the insured must renew the policy. It is preferred because of its affordability and the ability to provide financial cover to your loved ones from your unexpected demise.

Health insurance plan

Health insurance provides financial coverage and protects you from big medical bills. It provides protection in cases of hospitalisation, medical treatments and more as per your sum insured amount.

If you get yourself treated by the network hospitals of the insurance company, you may not need to pay in cash. The cashless facility available ensures smooth treatment and financial well-being.

Unit-linked insurance plan

ULIPs offer life cover along with return on investment benefits. One portion is further invested to generate returns, and the other portion is used to offer life insurance coverage.

The policyholder receives the aggregate maturity amount from all the funds upon the policy's maturity. It also offers tax benefits² along with wealth creation.

Endowment plans

Endowment plans, also called guaranteed savings plans, offer insurance and investment benefits. An amount at lumpsum is paid to the policyholder/nominees upon his demise or the policy's maturity.

These plans often intend to build savings habits among individuals. They provide financial security for your family and often offer surrender benefits, too.

Pension Plans

Pension plans are investment plans provided by multiple life insurance firms to build retirement funds to be used post-retirement.

The premiums you pay are invested in the kind of securities you prefer, and after the policy matures, you start getting pensions/monthly income. You can either get pensions at regular intervals or purchase annuity plans with withdrawn amounts or proceeds.

Auto insurance

Widely known as motor insurance, it aims to provide protection against loss or damage for vehicles like two-wheelers, cars or any commercial vehicle.

The premiums to be paid depend on multiple factors like the type of vehicle, the type of fuel, the condition and age of the vehicle, etc.

Home Insurance

Home insurance has become essential for every homeowner. It defends your property from man-made damages or natural calamities.

Both the structure and the contents of houses can be insured except for tenants who can only insure the contents of the home. It can also cover art, paintings, jewellery, loss by theft, etc.

Selecting the Right Insurance Plan

While purchasing an insurance plan for yourself, you must keep the following points in mind:

Adequate Coverage

You must assess your requirements and select a plan that aligns with your financial needs. For example, you can add riders¹  to improve the coverage of your policy. Hence, assessing your needs is crucial and a starting point.  

Ability to Pay Premium

You must only select policies that align with your income levels. This is a necessary step since paying premiums is a regular financial obligation. In certain policies, if you fail to pay premiums on time, the policies may even lapse.

Policy Period

While buying a plan, you must assess your age, income, child’s age, debts, etc. to make the right choice. For example, if you wish to retire at 50 instead of 60, it is advisable to select a policy that will align with your retirement goals and provide you with sufficient post-retirement income.

Personal Factors

Your age, health, dependents, income, goals, etc., greatly impact the kind of policy you must select. For example, if your parents are ageing and prone to illnesses, buying a health insurance policy is advisable.

FAQs On The Importance Of Insurance

How to choose the right insurance plan?

To choose the right policy and an exact insured value, you must assess your goals, requirements, lifestyle, dependents, policy duration, premium amount, policy coverage, etc.

What is the waiting period for an insurance policy?

The waiting period is the period during which an insured has to wait before the coverage of the policy begins or comes into effect.

What is the importance of insurance?

It acts as a safety net & protects from unexpected circumstances such as accidents, theft, illness, loss of unemployment, etc. It also helps save on annual income tax and build wealth.

Which insurance is compulsory to buy in India?

Car insurance is mandatory in India. Considering the number of accidents, motor insurance has been made compulsory for everyone.

What is the frequency of premium payments?

It refers to the intervals or time gaps after which you must pay premium insurance policy payments. These can be monthly, quarterly, half-yearly or annually. It may vary from one policy to another. 

ARN -  ED/04/24/10531