What is Insurance?

Well by definition insurance is basically a prediction against a potential eventuality. In legal definition it is an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.

The first thing that we need to understand is while insurance, by definition, is not investment but, in a way, it impacts our regular investments. By taking financial care of eventualities it ensures every other financial need does not get skewed during such eventualities including investments.

e.g., just assume you have beautifully divided your monthly earnings into your expenses and investments and you do ensure you follow it religiously every month to reach the financials goals you have defined in life but you are not insured. Now any eventuality that demands sudden flow of large capital e.g. medical needs could throw off your plan for months altogether. And thus insurance indirectly becomes a wise investment.

Primarily there are 2 types of insurance

Life Insurance

General Insurance

Insurance for Life

Insurance for everything other than life

Term Insurance

Simplest form of insurance where the nominee receives the sum assured in the event of death of the insured

Endowment Plans

A portion of the premium covers for life insurance and the rest of it is invested in low risk debt funds thus ensuring term insurance in case of death of insured and/or at the completion of policy period there is a sum-assured that is paid to the insured 

Unit Linked Investment Plans or ULIP's

ULIP’s are like Endowment plans in the sense that a portion of premium covers for the life insurance and the rest of it is invested but not in low risk debt funds. ULIP focusses on capital appreciation by investing the amount in equity market which is why the return on ULIP’s is not pre-defined but linked to the market. These kind of insurance plans will normally have a lock-in i.e. you cannot get out of these plans for a certain amount of pre-defined period 

Motor Insurance

This is insurance for coverage of risks arising out of the use of motor vehicles such as 4-wheeler, 2-wheeler etc. For personal use and commercial cars, trucks, other carriage vehicles, etc. For commercial use. Motor insurance is mandatory as per the Motor Vehicle Act but you need to understand each component in detail to get the best deals favoring your conditions and usage pattern. E.g, someone who changes his/her car as frequently as 2-4 years will have very different needs as compared to someone who intends to use the car for a very long period. What is legally compulsory is a 3rd party insurance but get to the depths of 1st party insurance, 2nd party insurance and add-on’s including Zero Depreciation Cover (ZDC), Engine Protection Cover (EPC), Roadside Assistance (RSA), Consumables Coverage, Return to Invoice (RTI)

House Insurance

House insurance in itself can be divided into 2 parts, insurance of the structure itself and insurance of the good inside the structure (normally taken by tenants). When taking house insurance keep in mind what exactly is it that you are insuring yourself for. E.g., if you insure yourself for reconstruction cost and you live in a high rise, it may not serve the purpose, moreover the construction value depreciates over time. Alternately if you own the land and live in an independent house, the cost of structure with a few add-on's may be good enough. Remember insurance works on the probability of something happening and thus you will see insurance against fire or earthquake will be relatively cheaper (unless you live in an earthquake prone area). You will need to understand your surroundings to make better decisions on your insurance, e.g., earthquake / flood prone area, border towns, previous cases of terrorism, etc. It is always useful to take comprehensive cover for property value and add-on for valuables like portable electronics (laptop, expensive watches, cameras, etc.), jewelryterrorism cover and public liability. Now when you will try to buy this kind of insurance there will be options to get the cover for a longer duration offering discounts, it is advisable to not go for very long term insurance because your property value increases over time and you may want to accordingly increase the cover, at best go for a 1-2 year policy and not more. 

Home Loan Insurance

Please be very clear, home loan insurance is not home insurance. This insurance covers the balance payment of home loan EMI’s in case of the demise of the borrower. You need to understand that this is a diminishing insurance. E.g. if the borrower took a loan of 1Cr, the insurance on day 1 stands at 1Cr, however over time as the borrower pays the EMI’s and let’s say the home loan principle diminishes to 75Lakh, the insurance now is liable to pay only 75 Lakh and not 1Cr. A lot of people suggest that to avoid such situation it is better to take a term loan of 1Cr on day 1 and carry it till the EMI’s are finished, that way even if the principle reduces to 75Lakh, the nominee still gets 1Cr. However, there is a catch in there, if for some reason there is a delay in receiving the term loan insurance amount, nominee is still liable to pay the balance home loan amount. The smart thing to do here would be to carry a home loan insurance in initial years and over time as your capital appreciates shift to term loan. This will ensure that in case of an unlikely event in early years the home loan is taken care of and in later years when the principle has diminished to a level that can be taken care of by accumulated funds, term loan benefits are availed by the nominee. 

Health Insurance

This is potentially the most used and most notorious insurance. Most people today have and avail health insurance either at a personal level or through the company alliances where the health insurance is a part of their salary package. This insurance basically provides coverage for medical expenses. When taking medical insurance take good care in understanding exclusions (e.g. pre-defined diseases, pre-existing disease for a certain number of years, pregnancy), limits (e.g., daily room charge limit), critical care coverage, co-pay (a 10% co pay means you pay 10% of all approved expenses and 100% of balance not covered in insurance e.g. consumables). Most importantly take due care in deciding the medical cover value, you need to keep in mind this is for an unfortunate tomorrow and should be able to cover medical costs for tomorrow.  

Commercial Insurance

This is coverage for commercial purposes, e.g., stock in a warehouse, a commercial vehicle, a shop or manufacturing unit, etc. 

Travel Insurance

Travel insurance covers you for unforeseen troubles when you are travelling outside your hometown, more so when travelling outside the country. You do not want to get into financial troubles in a country where no one else knows you. This can cover medical emergencies, trip cancellation / interruption / delays, medical evacuation, and lost, damaged, or stolen luggage / passport / other important documentation and goods. 

Things you should ensure when taking an insurance

  • Read all documentation, even the smallest details and question the insuring company if you are not clear. Most important do that in writing and not on verbal commitment of your sweet insurance agent.
  • Fill all the information yourself, don’t just sign where your agent tells you to. The smallest mistake can take you for a ride at the time of need. 
  • Re-think and recalculate 10 times before you include add-on's to insurance, e.g. life cover with a special add-on for accidental death. 
  • Plan for when you think you will need the insurance and not for today. A medical insurance of 1Lakh INR, 20 years ago would have been pretty decent, well today’s decent could be 10Lakh and if you are in your 20’s the most need of this insurance will come in in after 20-30 years and again 10Lakh at that time may not be enough. 
  • Try to have one policy of each kind to avoid complications. In any case, other than life insurance, you have a huge insurance, but you are covered only for your losses. E.g. your medical insurance can be for 10-Lakh but you will really get the amount that you spend in the hospital and not the complete 10Lakh. 
  • Inform the insurance company as soon as you can in case you need to avail the insurance. 
  • Share all information with complete truth and nothing but the truth both while taking insurance and while availing insurance. If you drink or smoke, well try to give up but don’t hide this information just to save on premium. You may end up losing premium as well as benefits at a later stage.