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Insurance

In simple English Insurance means a 'transfer of risk. It has been practiced in many forms and manner across the ages. In ancient times there were Burial societies that collected a voluntary contribution from every family and paid out a fixed sum to the family whose member expired for conducting burial rites. This is Insurance in its most basic form where a group facing a common risk gets its members to contribute a certain sum of money (premium) which is then paid out to the member who actually suffers loss due to the risk.
In modern times the group administration is done by an independent for profit insurance company. The insurance company collects premium from all the members of a group carrying the risk and then pay out the sum to the member who actually suffers from the loss and keeps a profit margin for itself.

There are 3 common forms of Insurance

1)    Life Insurance: Imagine a married couple with minor children. If the wage earner dies and the existing assets are not enough then the family will not be able to maintain the same lifestyle that it was used to earlier. This is where an insurance company steps in. It charges a fixed sum every year (premium) and pays off a lump sum (called the sum assured) if the person dies within the covered period. This type of pure insurance is very cheap and is also called Term insurance.

a.    Many times the insurance company will increase the amount of premium and invest the difference on your behalf. This invested amount along with the returns less the expenses incurred is then returned to you periodically (money back) or in a lump sum (endowment policy). It is usual for the insurance company to provide for a small guaranteed return in such cases and the balance is based on the actual returns earned by the insurance company less the actual expenses incurred by the Insurance company

b.    If the excess amount is invested in a mutual fund then such a policy is called ULIP or Unit linked insurance plan where no returns are guaranteed and are directly linked to the performance of the securities invested in by the fund.
c.    Key man insurance this is typically taken by a company or a firm to compensate it for the loss incurred by it due to the early death of a key manager or executive of the company.

2)   Health Insurance

a.    Mediclaim:
or hospitalization expenses reimbursement policy pays for the hospitalization expenses incurred if you are hospitalized due to disease or illness or accident. This covers hospitalization expenses incurred only in India.

b.    Critical illness policy: It pays a lump sum if you contract a covered serious illness such as stroke, organ failure, cancer, multiple sclerosis, etc. The lump sum is paid irrespective of the expenditure incurred in treatment of the disease. The diseases covered are normally serious and normally impact your ability to earn in the future. The lump sum you receive assists in generating interest income to replace this lost income.

c.    Daily cash allowance policy: This kind of policy pays a fixed daily allowance for each day spent in the hospital. This is irrespective of the actual cost incurred in the hospital. This kind of policy is meant to cover incidental expenses such as travelling costs, costs of the attendant, loss of pay etc. that are not covered by a mediclaim plan.

d.    Overseas Travel policy: This kind of policy will typically cover hospitalization expenses incurred while overseas. It can also provide various add on covers such as loss of passport or luggage, losses caused due to delay in flights, cancellation of trip due to illness/death of one of the travelers or his close relatives, etc.

3)    Property Insurance

a.    car insurance: You need to buy a car insurance policy to make sure that you are in a position to pay for the damages incurred by a third party due to your car. This is called third party car insurance. You have to have this policy before you can take your car on to a public road. A typical Car insurance policy will also cover the loss arising from the theft of the car or the damage caused to the car due to an accident. There can also be various add on covers to provide a fixed amount to cover the paid driver or  passengers travelling in the car in case of an accident or to cover the car for replacement value rather than market value, etc.

b.    Householder Policy: This kind of policy reimburses the losses caused due to fire, flood, earth quake, lightning, etc. to any property and to the items such as furniture, consumer durables, etc. kept in such property.  It can also provide add on covers to reimburse the loss caused due to theft or burglary on the premises or damages caused to electrical appliances due to surge in power, etc.


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