What is Insurance?

Insurance is a way of protection from unexpected or unpredictable financial losses. It is a way through which you manage your financial risk. An insurance is a written contract, commonly called a policy, between an individual (policyholder) and the insurance company (insurance provider).


While the insurance company is the insurer, the policyholder may or may not be the insured individual. He/she may buy an insurance policy that seeks to protect another person from losses (in which case, that person becomes the insured). For example, when a parent buys health insurance for his/her minor child, the parent is the policyholder while the child is the insured individual.

Common Terms Related to Insurance


Policy is the contract between the policyholder and the insurance provider.


Premium is the fee or the regular amount of money that the policyholder is responsible for paying to the insurance company when he/she buys the insurance policy. Premium can be paid monthly, quarterly, semi-annually or annually.


Insurance cover is the total amount of risk that is covered by the insurance company in case of an unexpected loss to the insured. It is the maximum amount that the insurance company is liable to pay for the losses to the insured.


Typically, you have to pay some amount towards the loss out of your own pocket before the insurance company comes in to settle the rest of the claim. This amount is called the deductible.

How Does Insurance Work?

Usually, insurance policies are set for a specific period of time, at the end of which it matures. After the end of the term, you need to either renew your policy or buy a new one.

Insurance is a way through which you buy protection for yourself or your close ones by paying a nominal amount (premium) regularly, in return for which the insurance company takes the responsibility for any risks or losses that might take place.

Types of Insurance

The four major types of insurance in India are as follows –

  • Life Insurance

Life insurance pays a person you choose a fixed amount of money if or when you die. It gives the person the lump sum amount when the insured person dies. This thus helps provide your family with financial stability.

  •  Health Insurance

Health insurance can be bought for yourself, your parents, your siblings, your children or your spouse. It helps in cases of medical emergency and can be used towards payment of medical bills and covers the medical expenses in times of need.

  • Motor Insurance

This is one of the most important insurances in the recent times. It provides protection to your vehicle against accidents due to collisions or any other damages.

Advantages of Insurance

Insurance policies provide a wide range of advantages. Insurance provides financial safety, tax benefits, and so on. The major benefits of insurance are as follows –

  • Protection against Financial Losses

Insurance provides a way of protection against unpredictable and unexpected financial losses. They reduce the impact of financial loss during tough times and provide a safety net for the insured.

  •  Protection against Uncertainties

Insurance coverage provides protection against unprecedented losses and hazards. It provides a feeling of safety against the unexpected uncertainties of life.

  • Investment linked Policies

There are various investment linked insurance policies which pay a part of your premium towards various investment schemes. Hence, part of the premium money goes towards investments of your choice.

  •  Risk Distribution

An insurance company pools the premiums of various individuals and helps to cover the losses of the individuals out of the pooled money and thus helps to reduce the risk on a single entity.

  •  Economic Growth

Since insurance funds are invested in different kinds of development projects such as infrastructure, electricity, etc., it helps in promoting the economic growth of the country. Insurance business also helps in creating and providing employment opportunities in the society.

  • Ease in Receiving Loans

Many banks provide loans comparatively easily against insurance policies. For example, having a home insurance helps while getting a home loan.

  • Promotes Saving Habits in People

Insurance policies help induce saving habits in people. They help keep individuals liable for paying premiums that act as a safety cushion towards unpredictable hazards or accidents of life and this liability encourages people to save money.

  • Tax Benefits

There are various income tax benefits related to insurance plans depending upon the type of insurance and the policy.


The premium paid towards buying life insurance for yourself or your parents is eligible for tax exemption up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act.


The premium paid towards buying health insurance for yourself or your parents is also tax deductible under Section 80D of the Income Tax Act.


Under this section, an individual is eligible for tax exemption on the sum assures as well as the accrued bonus received on the maturity of the life insurance policy by you or the insurance policy nominee.


Insurance provides financial assistance in times of unexpected events and hazards. It also helps in risk management. A useful rule before buying insurance is to research the different insurance companies and find out the one which provide the kind of assistance and protection you are looking for and then buy the insurance accordingly.

Leave a Comment