Importance of Insurance | Why Do You Need Insurance Cover

What Is Insurance?

Insurance constitutes a lawful contract involving a pair of parties: the insurance company and the insured. In this arrangement, the insurance company commits to compensate the insured for their losses in the event of a contingency. A contingency pertains to the incident that triggers a loss, which could encompass scenarios like the demise of the policyholder or harm to/demolition of the property. The term "contingency" is used because there exists an element of uncertainty regarding the occurrence of the event. The insurer offers the insurance benefit against the premium paid by the insured. The Insurance Regulatory and Development Authority of India (IRDAI) is the apex body that regulates the insurance sector in India.

In simple terms, insurance involves guarding against a specific risk that an individual may be exposed to. Essentially, it involves shifting the risk from an individual to an insurance company. The insurance company agrees to assume the risk for a fee (known as the premium) paid by you. When you encounter the risk and suffer losses, the damages incurred by you and your family are reimbursed by the insurance company in the form of claims.

By purchasing an insurance policy, you are essentially acquiring a protective barrier against the risks you encounter. This allows you to lead a tranquil life without excessive worry about the potential risks you might face.

Why Do You Need Insurance?

Here are the key benefits of insurance, making it a necessary financial tool:

1. Provides Financial Support:

Insurance policies help in covering expenses related to medical crises, hospital stays, the onset of illnesses, subsequent treatments, and anticipated medical needs. In the unfortunate event of the earning member's passing, insurance plans can mitigate the financial impact on the family. Moreover, these plans can facilitate the settlement of various debts, including home loans or other financial obligations that the insured individual may have accumulated during their lifetime.

2. Reduces Financial Risks:

Insurance Planning works to reduce the financial risks related to health issues, mishaps, demise, and similar circumstances. This preparation equips both you and your family to confront unexpected hurdles without compromising on your accustomed standard of living.

3. Takes Care of Family's Future Financial Needs:

Insurance plays a crucial role in securing the future well-being of your family members. In case of a policyholder's untimely demise, life insurance can provide a financial cushion to support the family's everyday expenses, education costs, and even loan repayments. It ensures that your children do not have to compromise their aspirations and ambitions, even in your absence. Insurance ensures that your loved ones can maintain their quality of life even when you are not around.

4. Peace of Mind:

Knowing that you have adequate insurance coverage brings a sense of security and peace of mind. Insurance serves as a means to swiftly restore you and your family to your usual financial stability after an unfortunate event. This peace of mind lets you focus on your daily life and long-term goals without constantly being concerned about the "what-ifs."

5. Helps Achieve Long-term Goals:

An unforeseen medical emergency, the unfortunate loss of an earning member, or an unanticipated financial burden can trigger a serious financial strain, potentially forcing you to liquidate investments earmarked for significant long-term goals like your child's education or retirement. Nevertheless, having robust insurance coverage allows you to navigate such challenging situations without liquidating your investments or valuable assets, thereby maintaining your progress towards achieving enduring goals. Moreover, certain life insurance policies offer unique features, such as regular income disbursements and staggered distribution of death benefits, ensuring that your loved ones' long-term goals are not compromised.

6. Provides Tax Benefits:

You can avail of annual tax deductions of up to Rs 1.5 Lakhs per financial year under Section 80C of the Income Tax Act 1961 for the life insurance premiums you pay. Besides, if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium, Section 10(10D) of the Income Tax Act makes the maturity benefit entirely tax-free.

Along with providing financial protection in case of a medical emergency, health insurance also acts as an efficient tax-saving tool. The premiums paid towards the health insurance policy offer tax benefits under Section 80D of the Income Tax Act 1961. Moreover, the health insurance premiums paid for the family, including spouse, children, and parents, are also eligible for tax exemption under Section 80D.

You can claim up to Rs 25,000 (and up to Rs 50,000 if you are a senior citizen) in a financial year for health insurance premiums paid towards yourself, your spouse, children, and parents who are less than 60 years old. For the premiums paid towards your senior citizen parents (above 60 years), you can claim up to Rs 50,000.

7. Helps in Economic Growth:

The insurance sector is important for the economy because it helps gather people's savings and turns that money into useful investments. Insurance also helps reduce losses and keeps the economy stable. It encourages businesses and trade, which leads to steady economic growth and progress. So, insurance is a key part of making the economy strong and steady.

What Are the Types of Insurance You Must Consider Buying?

There are several types of insurance coverage available for different needs. There are broadly two types of insurance, namely, life insurance and general insurance. General Insurance can be further classified as health insurance, car insurance, loan insurance, home insurance, cyber security insurance, and many more. Let's see a few crucial types of insurance in detail:

Life Insurance:

Life Insurance is a contract between an insurer and a policyholder. An insurer guarantees a sum assured to the beneficiary/nominee on the policyholder's unfortunate demise in return for the premiums paid. In simple words, Life Insurance provides financial security to your family so that they continue living the same lifestyle without any compromises due to the financial instability caused due to the loss of an earning member. Life Insurance comes in various forms, such as Term Plans, Money Back Plan, Endowment Plans, and Unit-Linked Insurance Plans (ULIP).

However, as insurance-cum-investment plans neither provide sufficient life cover nor do they offer attractive returns, it is wise to safeguard yourself with a Term Life Insurance Plan. Meanwhile, you can consider building a fund for your long-term goals using high-return-generating financial avenues like carefully selected equity mutual funds and stocks.

Term Insurance stands as essential life coverage for all, ensuring financial security for loved ones. This insurance type spans a defined period or 'term' and financially safeguards the policyholder's family in the event of their untimely passing. The beneficiary (nominee) receives the sum assured upon the policyholder's demise. Surviving the term grants an option to renew with an adjusted premium based on age and health. Term Insurance is a vital safeguard for family well-being, enabling renewal and financial peace of mind.

Click here to download our free comprehensive guide “Your Definitive Guide To Buy Life Insurance” to learn more about Life Insurance.

Health Insurance:

Health Insurance is a type of insurance that provides coverage against any medical emergencies arising out of an injury, illness, or accident. Health Insurance extends its coverage to medical expenses, such as hospital bills, medicines, consultation fees, etc.

A health insurance policy can be bought for a specific period by paying a monthly or yearly premium. The three major deciding factors of health insurance premiums are - Age of the insured, sum insured, and health habits.

Car Insurance:

Nowadays, buying Car Insurance is a crucial requisite for all car owners. This insurance serves as a safeguard against unforeseen occurrences such as accidents. Certain policies even offer reparation for harm inflicted upon your vehicle in the wake of natural disasters like floods or earthquakes. Moreover, it also covers third-party liabilities.

Cyber Insurance:

Cyber Insurance offers protection against losses resulting from cyber incidents and the unauthorised access or theft of valuable data. Traditional cyber insurance primarily focuses on providing coverage to businesses and key individuals within corporations, safeguarding them from risks associated with their information technology infrastructure, data privacy, and liability related to information governance. In simpler terms, it serves as a financial safety net for businesses, compensating for losses caused by data destruction, theft, hacking, extortion, and similar cyber-related events.

Home Insurance:

Home Insurance, ubiquitously known as Homeowners' Insurance, is a type of property insurance that provides coverage to a private residence. Basically, it covers you financially from physical losses and damages that could happen to your house, furnishings, and other such residential assets.

Apart from these, there are several other types of insurance you can consider based on your individual needs, such as Travel Insurance, Critical Illness Insurance, Personal Accident Insurance, Bike Insurance, etc.

What Are the Things to Take Care of When Buying an Insurance Policy?

Buying an insurance policy for the first time can be overwhelming. But, the time you spend understanding your requirements and doing thorough research to choose the right insurer and suitable policy is worth it. With technological advancement, you can do research online without stepping outside your home. You can also use online insurance calculators to determine the required insurance coverage. Here are the key things to consider when choosing an insurer:

• Company background

• Claim settlement ratio

• Premium

• Number of years of existence

• Financial stability of the company

• Solvency ratio

Furthermore, instead of opting for a traditional method of buying an insurance policy through an insurance agent, it is advisable to buy an insurance policy online as it offers numerous benefits, such as the abundance of plans from various insurers, convenient purchase and renewal, ease of research and comparison, cost-effectiveness, transparent process, customer support, instant coverage, enhanced security measures, among others.

Importantly, when buying an insurance policy, make sure you provide accurate personal and health details. Hiding or misrepresenting any crucial information can lead to claim rejection and/or policy cancellation.

To conclude:

The Importance of Insurance in our lives cannot be ignored. It serves as a shield that protects us from unexpected things that can happen. Insurance not only safeguards our financial stability during challenging times but also empowers us to pursue our long-term aspirations without fear. By adequately covering ourselves with insurance, we ensure that our families and loved ones are protected and our hard-earned investments remain secure. Life is full of surprises, and insurance is like a good friend that helps us feel sure and ready for whatever comes next. So, whether it's sudden sickness, our children's future, or planning for retirement, insurance helps us pave the way for a future that is safer and more promising.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.