Understanding insurance and its kinds

A chartered accountant and MBA, is an entrepreneur and financial literacy advocate. She has over 15 years of combined experience in consulting, advisory and travel industries. A national ranker in CA, Aarti is a published author, who has written a plethora of books for children's financial education and is currently helping build awareness for financial literacy for women through her platform, Sthreedhan.

 

Franz Kafka once said, "Better to have, and not need, than to need and not have". This statement has shaped not only my thought process, but also how I treat my material possessions in life.


One thing that we often undervalue at great peril and expense, is the idea of a back-up plan or a net-insurance. We are conditioned to believe that if we think positive, good things will happen to us and if we think negative things, bad things will happen to us. In this process, we even end up thinking that planning for adverse events in life is equivalent to negative thinking. That is directly opposite to the truth! Thinking of safeguarding yourself and your family in case of any kind of adverse events is the biggest sign of positivity. It shows your desire to live your life to your fullest and achieve your full potential.


Insurance isn't of one kind. People are generally lost in the world of jargon and feel intimated by the various types of insurance. At a broad level, there are just 2 types of insurance-life and general insurance.


Life insurance, as the term specifies, talks about insuring loss of one's life whereas all other forms of risk are covered by the term general insurance. General insurance includes health insurance, motor insurance, home insurance, fire insurance and travel insurance. These are things we need in the course of our daily life and, are often required to use them by the law even. Let's take a look at some more details regarding both categories and why we should invest in some of them. Before we delve deeper in into the different types of insurance policies, we should cover some basic terms.

Premium is basically your cost of taking the insurance policy. Premium depends on two things- the amount of risk involved in this case and the benefits being promised by the insurance company. Higher the risk, higher the premium. More the benefits being promised under the policy, higher the premium.

Sum assured is the amount that you are certain to receive in cases where what can go wrong, actually does go wrong.

Policy tenure is the period for which the insurance coverage is provided as per the policy terms.

Beneficiary is the person who will get the sum assured in the event things go wrong.


Now, coming to the types of policies, life insurance policies in general, provide some degree of financial assistance to the family of the deceased in the worst-case scenario. Under life insurance policies, however, there are many different types. The cheapest of life insurance policies, is term insurance. Term insurance policies will give the sum assured, to the family of the deceased. There is no maturity value, i.e. the policy holder will not get anything at the end of the policy term.


The next type is endowment plan. These are insurance-cum-savings plan in which, if the policy holder survives the policy tenure, they will get a lump sum amount at the end of the policy period. If something happens to the policy holder, the family still gets the sum assured and the accumulated amount as per the terms of the policy.


It is a good option for those with a low-risk appetite.


We hear a lot on television about ULIPS or 'unit-linked insurance plans'. Here, part of the premium goes towards investing in market-linked equity and debt instruments. You can actually choose what portion of the premium you want to invest and where. This is very useful for people who find it hard to build an investment habit. Since the ULIP is a monthly investment, you can arrange for it to be debited to your savings account as soon as you get your salary. Unlike endowment plans, there is a market-related risk component in ULIPS. So, those people who have a moderate risk appetite, can opt for these.


For those who want to specifically secure the future of their children, a good option is taking a child plan. Here, a specified amount is received at the time of the child's higher education or marriage. The added benefit is that, if something happens to the policy holder, the insurance company will also pay the balance instalments under the policy to ensure the child gets the promised amount for their higher education or marriage.

Finally, you have pension plans which are basically an additional source of income for the policy holder after they retire. You invest a fixed amount now to ensure your needs are taken care of, along with inflation in your later years of life.

Nowadays, you have a choice of insurance companies, government and private, to choose from. There are also many websites that help you compare the plans and choose the one that gives you not only a cheaper premium, but also better benefits. You may want to spend time to make that choice now rather than later, because as Sun Tzu said, "plan for what is difficult while it is easy".


This article originally appeared in the TeacherTribe Magazine December 2021 edition.