A complete guide to understanding Insurance Basics in India. I will cover Insurance in 6 parts. This article is the first in the series and will cover the basics of Insurance to understand the next coming articles.
Importance of buying Insurance
Insurance is almost a necessity that many people tend to ignore. Besides, this is an important aspect and one should seriously consider buying Insurance as it really pays off to reduce Income tax too. To know more about buying Insurance plans, click here.
Further, this article series will help you to buy the right Insurance plan customized for you. So, let's get into it.
The six-part series will cover the below parts.
- Basics of Insurance and Technical terms
- Life Insurance. Right Investment plan
- Health Insurance customized for parents
- Health Insurance for you and your family
- Insurance against loans
- Vehicle Insurance
These 6 topics will cover most of the things that one needs to know about buying Insurance.
Fundamentals of Insurance basics
First, what is Insurance? Basically, we give a pre-decided amount/Premium to an Insurance company monthly or quarterly or half-yearly or annually because we want protection. Indeed, protection against something that you cannot plan or predict. So, if something unexpected happens, Insurance provides you financial protection.
The pre-decided amount or premium that is to be given will be dramatically lower than the actual amount you are paid when something unexpected happens.
Premium is that amount to be paid for a contract of Insurance. The premium could be paid monthly, quarterly, half-yearly, or annually. Premium is the amount you give to get the financial protection that the Insurance company promises you.
The Cover is the amount of risk or liability that is covered. To what limit, what scale, what amount, will you get this financial protection is called the Cover.
This is a beautiful way to secure your entire family for just 15000 annual premium. Moreover, the premium amount will depend on the risk factor. Before that, let us understand how does this works. How can a company pay you 4 lakhs just for 15000? Let us understand.
How does an Insurance company work?
The contract that you have with the Insurance company to pay you 4 lakhs cover in the above example is called a Policy.
The insurance company has done its own calculations and estimated the number of hospitalizations. They do this using advanced techniques like Artificial Intelligence and Machine learning. They concluded that the average hospitalization rate for this village is 2 percent.
It means that 2 people will claim the cover of 2 lakhs. Let us assume that the 2 people will ask for the entire cover of 4 lakhs whereas the hospital bill could be very well less than 2 lakhs. Still, the Insurance company has only to pay an amount of 4 lakhs where it gets a total of 10 lakhs from the village. Straight 6 lakhs profit. This process is called Risk Pooling.
Generally, Insurance companies will collect the data from many hospitals and maternal fraternities to perform analysis to decide on the average hospitalization rate. It could be more in one year and less in another. Overall, it averages out and remains as per the company's prediction.
Furthermore, the Insurance company will invest this amount in mutual funds, pension funds, etc., and will gain more profits. This becomes an additional revenue source for the company.
How to decide Insurance premium | Insurance basics
The insurance premium will be decided based on the risk factors.
For example, a candidate of 25 years has a less chance of getting hospitalized when compared to a 40 years old gentleman assuming all other criteria remain the same. So, the premium for 40-year-old will be more than 25 years old's.
Hope this is useful and cleared your basic understanding of Insurance basics and this knowledge will help you to understand the next chapters and topics coming in the future about Insurance. To read more about financial topics like personal finance, please read Personal Finance-Investment Strategy.
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