The insurance market appears to be a difficult enigma, and with all of the insurance lingo, we believe it is best if we avoid becoming involved. However, insurance is a crucial commodity that protects us against a variety of life’s uncertainties, such as illness or accidents. Every individual’s financial portfolio should include it. So, here I am, simplifying the complex world of insurance so that everyone can comprehend it and make crucial financial decisions.
In simple words, insurance is a contract (known as a policy) in which the policy buyer receives financial protection and reimbursement for losses from the insurer or insurance firm in exchange for making minor monthly payments.
The policyholder is the one who pays the small periodic amounts in this transaction. The person for whom the insurance is acquired is known as the life guaranteed. The policyholder and the life insured may or not be the very same individual. If a parent buys a life insurance policy for his kids, for example, the parent is the policyholder and the children are the life insured. Alternatively, if I purchased insurance coverage for myself, I am both the policyholder and the beneficiary life insured for the insurance.
Further, the sum promised or coverage is the amount of money that the insurer agrees to pay to the policyholder if he or she suffers the loss for which the policy is purchased. The term “death benefit” is a typical insurance jargon that is nearly synonymous with “sum guaranteed.” The main difference is that the life insurance can be an amount assured or much more than that, depending on if there is a rider benefit and/or other benefits. So, if you have fire insurance and your house is burned down in a fire, you have suffered a loss, and your insurer will compensate you for the damage, which will be the amount insured or coverage of your policy. This amount, as well as other perks, will be guaranteed go to your nominee (after the claim process) who is the legal heir nominated by the policyholder if something unfortunate happens to the policyholder.
In addition, policy tenure refers to the duration of time for which the insurance company will offer financial protection or coverage to the policyholder (like duration for the insurance to be valid). Be mindful, however, that mature age does not equal policy tenure. The age at which the policy expires is known as the maturity age of the life covered. If you obtain a life insurance policy at the age of 30 with a maturity age of 60, your policy maturity age will be 60, but your policy duration will be 30 years.
Another factor to think about is the free look period, which applies to all new life insurance plans. It is a period of time within which one can opt to return an insurance that has been acquired. So, if you purchased the incorrect insurance policy or are unhappy with its terms and conditions, you may return it during this time period and receive a refund after deducting certain fees. Also, if you purchase a policy and for whatever reason are unable to pay the premium on time, you can request a ‘grace period,’ which is essentially an extension of the premium payment due by a few days; nevertheless, if you still are unable to pay the premium, the policy will be cancelled. If you wish to keep the policy, you can reactivate it after the grace period, which is known as the revival period. You can also choose a paid-up value option, which reduces the total protected to a fraction of the insurance premiums while keeping the policy active.
It’s worth noting that all premiums paid toward the life insurance plan are tax deductible under Section 80 (C) of the Income Tax Act of 1961. The highest amount of deductible that may be claimed is Rs. 1.5 lakh. Under Section 10 (10D) of the Income Tax Act of 1961, the benefits provided to the policyholder/nominee are tax-free. As a result, insurance not only protects you against unforeseen losses, but it also aids in the reduction of your tax burden.
Finally, read the ‘Exclusions’ carefully before purchasing any life insurance. These are items that are not covered by a life insurance policy and for which the insurance company would not pay a payout if a claim is made. Suicide, for example, is not covered by any life insurance policy.
To summarize, there are a few key phrases that everyone should be familiar with before purchasing an insurance coverage. I believe that seeing insurance as a product rather than a contract or policy makes it simpler to comprehend. As a result, the jargons do not appear to be a difficult problem, and we do not avoid discussing insurance or related matters. With these words in mind, and insurance as a hedge in mind, anybody can simply choose a policy that is best suited for them, allowing them to make more confident and informed financial decisions.
- Author Detail: Archita Joshi She is the MIT – WPU School of Economics, BSC (Honours – Economics)