To
have a proper financial planning, it is crucial to get the right type of
insurance. Some may have some form of insurance, only a few truly understand
what it is or why they should possess it. For most people, insurance is a form
of investment or an excellent means of tax savings. When you inquire from a
average person about their investments, they will be glad to mention an
insurance product as part of their major investment. Among the about 5% of people
who are insured, the proportion of them who are very well insured is very low. A
few policyholders think that insurance is just that alone. Probably no other
financial product has seen such rampant fraudulent selling by agents overly
eager to sell products that link insurance to investment, so as to earn huge
commissions.
What
is insurance?
Insurance is a method of dividing a tangible amount of financial risk from a single person or business concern to a large group of persons or business entities in the event of a predetermined unfortunate event. Insurance cost is the monthly or yearly compensation paid to an insurance firm. For insurance in its purest form, if an expected event does not take place until the specified period, the money paid as compensation will not be refunded. Insurance is an effective way to distribute risks among a group of insured persons and reduce the financial burden on them should a shock occur.
The
Insurer and the insured
When
you seek financial risk protection and contract with an insurance provider, the
insurance company becomes your insurer and you become the insured.
Also Read: What type of life insurance policy should you get?
Reasons why you should purchase life Insurance
Sum
assured
In
life insurance, this is the amount of money the insurance company agrees to pay
at the death of an insured before the predetermined time. This does not include
additional bonuses in the case of non-temporary insurance. This amount
guaranteed may be called insurance coverage in non-life insurance.
Premium:
To
protect against financial risks offered by the insurance company, the insured
must pay a compensation referred to as premium. It can be paid quarterly, annually,
monthly or as stipulated in the contract. The total amount of premiums paid is
several times less than the insurance coverage or it will not make sense to ask
for insurance. The factors that determine the premium are
coverage, age of the insured (natural person, vehicle, etc.), and number of years
for which insurance is required, to mention but a few.
Nominee:
The nominee is the beneficiary designated by the insured to receive the sum assured and other benefits, if any. In the case of life insurance, it must be someone other than the insured.
Rider:
Some
insurance policies may provide additional features as extras in addition to the
actual coverage. It can be used by paying additional installments. If these
features are purchased separately, they will be exorbitant. For example, with your
life insurance you can add a personal accident rider.
Policy
Term:
The
term of the policy is the number of years you want protection for. The term is
determined by the insured at the time of buying the insurance policy.
Paid-up
Value and Surrender Value
If
you want to leave a policy before the expiration of its term, you can stop it
and get your money back. The amount the insurance company will pay you in this
case is called the surrender value. The policy no longer exists. Alternatively,
if you stop paying the premiums halfway through but don't withdraw the funds,
the amount will be called as paid. At the end of the term, the insurance company pays you in
proportion to the amount paid.
Now
that you know the terminology, in plain English, this is how insurance works.
The insurance company collects premiums for a large group of people who wants
insurance against a certain type of losses. With the assistance of its
actuaries, the company performs a statistical analysis of the possibility of an
actual loss occurring in a certain number of people and determines the premiums
taking into account other factors, as mentioned above. It is based on the fact
that it is not every policyholder that will suffer losses at the same time and
many of them may not suffer a loss at all during the time of the contract.
Whatever
risks that can be quantified in terms of money is likely to be insured. In
order to keep your loved ones safe from losing money because of a premature death,
you can take out a life insurance policy. You can opt for a Mediclaim policy to
protect yourself and your family from unexpected medical bills.
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