What is Insurance?
Insurance provides protection against financial loss in case something unfavourable happens to you. This can be related to medical emergencies, vehicle theft, property damage and even death. It is a written contract between the insurance company and policy holder. Through this legal contract, the policy holder gets privileges in case of such emergency.
As per this agreement, the insurer agrees to cover any financial loss for the policy holder. The insurer provides funds based on the loss or risk that is accidental or above the control of the insured. While buying insurance policy, you must be aware of certain things. These include insurance types, insurance coverage, terms and conditions, premium payment schedule, etc.
Types of Insurance
Based on your requirements, you can opt for multiple types of insurance:
1. Health Insurance
Health insurance is available in various forms, including HMO, PPO, EPO, and POS plans, each with unique network and payment rules. These plans often cover mental health and rehabilitation services. Wellness programs may also be part of the package.
2. Life Insurance
Term life insurance is cost-effective but doesn’t accumulate value. In contrast, whole life insurance costs more but builds cash value. Universal life insurance combines flexible premiums with investment opportunities. It’s also used for estate planning.
3. Auto Insurance
Coverage for uninsured/underinsured motorists acts as a safeguard against inadequately insured drivers. Personal injury protection pays medical bills regardless of who’s at fault. Factors like driving record, vehicle type, and usage influence premiums. Safe drivers may receive discounts.
4. Auto Insurance
Policies for property insurance may include coverage for valuables such as artwork and jewelry. If your home is uninhabitable after damage, loss of use coverage helps. Policies may pay out the actual cash value or the replacement cost. Deductibles and limits apply.
5. Liability Insuran
Public liability insurance handles claims of injury or damage from the public. Employers’ liability insurance, often compulsory, covers workplace injuries. Insurance for directors and officers defends against claims related to governance.
6. Disability Insurance
Disability insurance might have an initial waiting period. ‘Own-occupation’ policies cover job-specific disabilities, while ‘any-occupation’ policies are more general. Benefits typically reflect a portion of the insured’s usual income.
7. Travel Insurance
Travel insurance packages may offer round-the-clock emergency assistance. They cover interruptions, baggage issues, and delays. ‘Cancel for Any Reason’ options are available. Policies can be bought for single trips or yearly.
8. Business Insurance
Errors and omissions insurance is for professional service errors. Product liability is essential for manufacturers and sellers. Cyber liability insurance guards against online threats. Specialized policies, like medical malpractice, cater to specific sectors.
9. Long-Term Care Insurance
This insurance type can include coverage for day care for adults and Alzheimer’s care. The duration of benefits varies. To protect against inflation, some policies include cost-of-living adjustments. Early purchase typically means lower premiums.
10. Credit Insurance
Trade credit insurance secures suppliers from defaults in business transactions. Credit disability insurance takes over loan payments during borrower disability. Credit life insurance settles the debtor’s loans posthumously. Premiums are often loan-dependent.
How does Insurance Work?
When you buy a policy, you need to make payments for premium on regular intervals. You may think what is insurance premium? It is part by part cost of insurance that the policy holder has to pay for avaling the benefits of the policy.
Insurance premium is determined by the probability and law of large numbers. Based on these, the cost is decided considering the risk factors. Higher the probability of an event, higher is the cost of the premium.
Many policies include deductible. It is a type of amount that you need to pay before the insurance company pays its share. Higher deductible will lead to less premium amount.
For instance, for a home insurance, the total damage is 10 lakh rupees. However, your deductible share is 2 lakh rupees. In such case, your insurance company will be liable to pay 8 lakh rupees.
Let us consider health insurance to illustrate how insurance works through a scenario:
Say, John is a 30-year-old software developer who has purchased a health insurance policy. He pays a monthly premium to keep his insurance active.
He goes for an annual check-up, which is fully covered under his health insurance plan as preventive care. He pays nothing for this visit, as it’s included in his benefits.
One day, John wakes up with severe abdominal pain and goes to the emergency room. He is diagnosed with appendicitis and needs surgery.
John’s health insurance plan has a $1,000 annual deductible. This means John must pay the first $1,000 of his medical costs for the year before his insurance covers the expenses.
After John pays his deductible, his health insurance plan has a 20% coinsurance. This means for the remaining hospital bill, John is responsible for paying 20%, and his insurance will cover 80%.
John’s plan also has an out-of-pocket maximum of $5,000. This is the most John will have to pay in a year for covered services. Once he reaches this limit, his insurance pays 100% of his covered medical expenses for the rest of the plan year.
How to File Claim?
Considering the same scenario, let us understand the process of filing an insurance claim for John’s scenario, outlined in steps:
Receiving Medical Services: John is treated at the hospital, which collects his health insurance information.
The Claim is Initiated: The hospital sends a detailed claim to John’s insurance provider for the services rendered.
Review of the Claim: The insurance company reviews the claim against John’s policy to determine coverage.
Explanation of Benefits (EOB): John receives an EOB from the insurer, explaining what costs were covered and what he owes.
Payment to Provider: The insurance company pays the hospital directly for the portion of the bill they cover.
Patient’s Payment: John receives a bill for any amount not covered by insurance, which he is responsible for paying.
Appeal if Necessary: If there’s a dispute or denial, John can appeal the insurance company’s decision.
Final Resolution: After all payments and appeals, the claim is closed once John settles any outstanding charges.
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Why do we Need Insurance?
Insurance has numerous benefits for the policy holder. Some of the major benefits of insurance include the following:
1. Financial Security During Medical Emergencies
Although an individual may have enough savings, medical treatments for his/her family may go beyond the available financial assets. Medical bills for surgeries, heart attacks, cancer are extremely expensive and can put a major dent in the bank statements. Insurance helps in covering such losses and prepares the insured financially for the future.
2. Secures Businesses
Business owners need coverage for liability claims and property damage. Otherwise, their companies may not be able to function after covering for a loss. This applies to all businesses – small, medium and large. In general, small business owners have greater risks when they do not have an insurance plan. Any damage to his/her company without it must be paid for, from his/her own personal expenses.
3. Income Tax Benefits
Purchasing insurance can reduce the income tax payable. Section 80C of the Income Tax Act maintains that
