INSURANCE | Types, Methods, Benefits

Insurance

What Is Insurance?

Insurance is a contract, between two parties whereby the insurance company agrees to undertake the risk of individual or entity in exchange for consideration is known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period (in case of life insurance) or to indemnify the other party on happening of an uncertain event (in case of general insurance).

How does Insurance Work?

The insurer and the insured get a legal contract for the insurance, which is called the insurance policy. The insurance policy has details about the conditions and circumstances under which the insurance company will pay out the insurance amount to either the insured person or the nominees.

Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party. Insurance is a way of protecting yourself and your family from a financial loss. Generally, the premium for a big insurance cover is much lesser in terms of money paid. The insurance company takes this risk of providing a high cover for a small premium because very few insured people actually end up claiming the insurance.

Insurance Policy Components

Three crucial components of insurance policies are as under:

Premium: The premium is determined by the insurer based on your or your business's risk profile. However, different insurers may charge different premiums for similar policies. So finding the price that is right for you requires some legwork.

Policy Limit: The policy limit is the maximum amount an insurer will pay under a policy for a covered loss. Maximums may be set per period (e.g., annual or policy term), per loss or injury, or over the life of the policy, also known as the lifetime maximum.

Deductible: The deductible can apply per-policy or per-claim depending on the insurer and the type of policy. Policies with very high deductibles are typically less expensive because the high out-of-pocket expense generally results in fewer small claims.

Types of Insurance

"Life Insurance" industry is one of the flourishing industries in today’s globalised world. The life insurance industry is growing both in terms of economic impact as well as the one that generates employment opportunities in today’s emerging markets such as India. As defined under the Insurance Act, 1938, "General Insurance" business means fire, marine, or miscellaneous insurance business, whether carried on singly or in combination with one or more of them. Important points of distinction between Life Insurance and General Insurance as under:

Life Insurance

1.    The term may be fixed or variable.

2.    Pay-outs are certain either as claims or maturity benefits.

3.    Multi-purpose (e.g. investment, tax benefits, insurance).

General Insurance

1.    The term is fixed (usually 1 year).

2.    Pay-outs are uncertain as claims may or may not arise.

3.    Solely for the purpose of insurance 

Methods of Insurance

According to the Chartered Insurance Institute, there are variant methods of insurance as follows:

(a)  Co-insurance – Risks shared between insurers.

(b)  Dual insurance – Having two or more policies with overlapping coverage of a risk (both the individual policies would not pay separately – under a concept named contribution, they would contribute together to make up the policyholder's losses. However, in case of contingency insurances such as life insurance, dual payment is allowed)

(c)   Self-insurance – Situations where risk is not transferred to insurance companies and solely retained by the entities or individuals themselves.

(d)  Reinsurance – Situations when the insurer passes some part of or all risks to another Insurer called the reinsurer.

Insurance

Tax Benefits on Insurance

For the safety and security benefits of buying insurance, there are also the income tax benefits that you can avail in the following manner:

1.    Life Insurance Premium of up to INR 1.5 lakh can be claimed as a tax-saving deduction under Section 80C of the Income Tax Act, 1961.

2.    Medical Insurance Premium of up to INR 25,000 for yourself and your family and INR 25,000 for your parents can be claimed as a tax-saving deduction under Section 80D of the Income Tax Act, 1961.

These claims have to be made at the time of e-filing income tax returns.

Legal Framework in India

The statutory framework of the following statutes and rules made thereunder:

1.    The Insurance Act, 1938 as amended by the Insurance Laws (Amendment) Act, 2015;

2.    The Insurance Regulatory and Development Authority Act, 1999 as amended by the Insurance Laws (Amendment) Act, 2015;

3.    The Insurance Regulatory and Development Authority Regulations framed under the IRDA Act, 1999;

4.    The Companies Act, 2013; and

5.    The IRDA Investment Regulations, 2013.

6.    The Various regulations/guidelines/notifications/circulars/orders issued by IRDAI from time to time.

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