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| Home > Individuals > Basics |
BASICS
What is Insurance ?
"Insurance is a contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event."
Insurance is a protection against financial loss arising on the happening of an unexpected event. Insurance companies collect premiums to provide for this protection. A loss is paid out of the premiums collected from the insuring public and the Insurance Companies act as trustees to the amount collected.
For Example, in a Life Policy, by paying a premium to the Insurer, the family of the insured person receives a fixed compensation on the death of the insured.
Similarly, in a car insurance, in the event of the car meeting with an accident, the insured receives the compensation to the extent of damage.
It is a system by which the losses suffered by a few are spread over many, exposed to similar risks.
Why should you take Insurance ?
Insurance is desired to safeguard oneself and one's family against possible losses on account of risks and perils. It provides financial compensation for the losses suffered due to the happening of any unforeseen events.
By taking life insurance a person can have peace of mind and need not worry about the financial consequences in case of any untimely death.
Certain Insurance contracts are also made compulsory by legislation. For example, Motor Vehicles Act 1988, stipulates that a person driving a vehicle in a public place should hold a valid insurance policy covering " Act" risks. Another example of compulsory insurance pertains to the Environmental Protection Act, wherein a person using or carrying hazardous substances (as defined in the Act) must hold a valid public liability (Act) policy.
Who provides Insurance ?
In India, Insurance protection is made available through Public sector Insurance Companies, namely, Life Insurance Corporation of India (LIC) and the four subsidiaries of General Insurance Corporation of India (GIC).
All Life Insurance schemes are offered by The Life Insurance Corporation of India, while all the Non-Life insurance schemes are offered by the General Insurance Corporation of India through-
National Insurance Company
New India Assurance Company
Oriental Insurance Company
United India Insurance Company
By the passing of the IRDA Bill, the Insurance sector has been opened up for private companies to carry on Insurance business. Therefore, in the next one year, many more companies are expected to enter the market with new products.
How to get Insurance ?
The simplest procedure to obtain insurance is:
Approach the Insurance Companies directly.
Through Insurance agents of the concerned companies.
Intermediaries.
The procedure involves the proposer to complete a proposal form giving full details. Insurance contracts are based on good faith i.e. the details furnished by the proposer are accepted in good faith and this will form the basis of the contract.
What are the other alternatives to Insurance ?
One alternative to Insurance is to provide self-Insurance i.e. the individual has to create a fund to meet risk exigencies.
Specified trusts have also tried to provide insurance by a scheme of self-insurance. However, these are not very popular.
The postal department provides Insurance coverage to all working people.
There are many financial instruments which advocate savings and provide future returns at specific intervals such as the provident fund and pension plans. However, none of these provide for life coverage.
What are the other benefits of taking Insurance
Tax Relief:
Under Section 88 of Income Tax Act , a portion of premiums paid for life insurance policies are deducted from tax liability. Similarly, exemption is available for Health Insurance Policy premiums.
Money paid as claim including Bonus under a life policy is exempted from payment of Income Tax.
Encourages Savings : An insurance scheme encourages thrift among individuals. It inculcates the habit of saving compulsorily, unlike other saving instruments, wherein the saved money can be easily withdrawn.
The beneficiaries to an insurance claim amount are protected from the claims of creditors by affecting a valid assignment.
For a policy taken under the MWP Act 1874, (Married Women's Property Act), a trust is created for wife and children as beneficiaries.
Life Policies are accepted as a security for a loan. They can also be surrendered for meeting unexpected emergencies.
Based on the concept of sharing of losses, the society will benefit as catastrophic losses are spread globally.
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