What is Insurance: Definition, How it Works and Types of Insurance

Premium is the amount that the policyholder agrees to pay regularly to the insurer for a specific period of time. This premium acts as the cost of the insurance policy and is dependent on multiple factors. These can be age, health conditions, smoking habits and more of the person whose life is to be insured.

The period for which the policyholder chooses to pay their premiums is called the premium payment term of an insurance policy. This term can be the same as the policy period or it can be shorter too. For example, if you've taken a term insurance plan for 30 years and chosen to pay premium for 10 years only, then the premium payment term will be 10 years and the policy term will be 30 years.

The amount mentioned on the insurance policy document to be paid by the insurer at the time of claim is called the sum assured. In a life insurance plan, this sum assured can also be termed as life cover. If it's a ULIP, then sum assured will be equal to the principal life cover and the benefits accrued at the time of policy claim or maturity.

The maximum amount, also called as the compensation, that the insurer agrees to pay for the listed losses is termed as the policy limit of the insurance policy.

It should be noted that in the case of life insurance plans, policy limit is a pre-defined amount (sum-assured/life cover) to be paid in case of the untimely demise of the life insured (or at the time of maturity for plans other than a term plan), that too within the policy term.

The term for which the insurance policy is active and covers for the losses included in the policy contract is called a policy term. This term is determined at the time of purchasing the policy.

Deductible is a component restricted only to general insurance plans only. This is the amount that the policyholder has to pay from their pocket. For example, you have a health insurance of Rs 20 lakhs and in the policy document, it has been agreed that it will have a deductible amount of Rs 50,000. Now, if your medical expenses amount to Rs 1.5 lakhs, then the insurance company will pay for Rs 1 lakh and the remaining amount of Rs 50,000 has to be incurred by you.

Deductibles apply to other general insurance plans as well, excluding life insurance policies. Please note that there are no deductibles in a life insurance policy.

Note: This is a generic list and some components might vary basis the type of policy you're opting for.

Insurance plans like unit linked insurance plan, invest a part of the premium into several market linked funds. This way, they enable you to invest money regularly to benefit of market linked returns and fulfil your life goals.

The understanding of key benefits of insurance plans has improved among Indians in recent years. This has been illustrated by the India Protection Quotient (IPQ 6.0) survey conducted jointly by Max Life Insurance and KANTAR. The survey recorded that knowledge quotient of life insurance products among survey participants has increased to 61 in IPQ 6.0 compared to 57 recorded in the earlier IPQ 5.0 survey.

Apart from these, one can save significantly on taxes upon purchasing life insurance as well as health insurance plans in India. In the next section, we give a detailed synopsis of the same.

Under Section 80C: Premiums paid towards life insurance policies are eligible for deductions up to Rs 1.5 lakhs per financial year. In addition, one can get further benefit by purchasing life insurance policies for their spouse and/or children. These premiums can also be claimed as deductions. Please note that the total premium that can be claimed as deduction under Section 80C of the Income Tax Act, 1961, can be a maximum of 10% of the sum assured (for policies bought after 31st March, 2012).

Under Section 10(10D): Death benefit/maturity benefit and/or the bonus received from a life insurance policy is exempt from tax u/s Section 10(10D) of the Income Tax, 1961.

Premiums paid towards health insurance policies amounting to a maximum amount of Rs 25,000 are eligible for tax deductions Section 80D of the Income Tax Act, 1961. Additionally, for senior citizens, the tax deduction limit for health insurance premium is Rs 50,000.

There’s special provision for senior citizens getting health check-ups up to Rs 5,000 u/s 80D. This is only for preventive health check-ups.

The following instances do not come under the purview of life insurance:

Death due to war/terrorism, criminal activities, intoxication, substance-abuse, high-risk or life-threatening activities and suicide. However, death due to suicide is not covered for a few years from the date of commencement of the policy. This period can range from 1-5 years, depending on the policy terms and conditions.

Additionally, if someone has a life-threatening occupation, like mining, they might have to compromise with a limited coverage or pay higher premium for better life cover. You can use premium calculator to calculate how much premium you need to pay according to your occupation.

The following instances are not covered by health insurance:

Pre-existing conditions, self-inflicted injuries, transmitted diseases like syphilis, hepatitis and HIV-AIDS, pregnancy-related treatments (if maternity benefit is not included or is inactive), infertility treatments, cosmetic treatments, dental treatments, congenital treatments, vision or hearing treatments and experimental treatments etc.
That said, alternative therapies or medical-systems like aroma-therapy, naturopathy, homeopathy, acupuncture, Ayurved etc. are also not covered under health insurance policies.

The following expenses and/or incidents are generally not covered by car insurance:

Damage due to the normal wear and tear (depreciation), driving under alcohol/substance influence, driving without valid a driving license or damage to the vehicle caused by faulty wires/mechanics etc.

Additionally, if you pledge your car to someone else and then your vehicle gets damaged, your insurance company might not honour your motor insurance claim. Similarly, if the car is used for illegal activities or is used outside the geographical range mentioned in the policy document, any claim arising after such instance won't be covered under your car insurance policy.