What is Insurance and How Does Insurance Work

What is Insurance & How Does Insurance Work?

An insurance policy/plan is a contract between an individual (the Insured) and an insurance company (the Provider). Under the contract, you pay regular sums of money (as premiums) to the insurer, and they pay you if the amount insured arises from accidents, such as the premature death of the insured, an accident, or damage to the house. Let’s find out more about what insurance is and what are the different benefits, features, and types of insurance available in India.

Based on the conditions of insurance, the insurer provides the policyholder / nominal holder with a lump sum in case of unforeseen circumstances.

The choice of a particular type of insurance policy is made based on independent needs and life goals.

There are various components of an insurance policy, a solid understanding of which is very helpful in choosing the plan that best suits your needs.

Insurance Components

Here are some of these insurance components that will help you better understand what insurance is and how it works:

Insurance Premium Policy

The premium of an insurance policy is the amount that must be paid in order to acquire a certain amount of insurance coverage. This is usually expressed as regular costs, whether monthly, quarterly, semi-annual, or annual, that you incur during the term of the premium.

There are various factors on the basis of which the insurance company calculates the premium on an insurance policy. The idea is to check the insured person’s eligibility for the specific type of insurance policy he/she wants to purchase.

For example, if you are healthy and have no history of treatment for severe bodily illness, you are likely to pay less for a health or life insurance policy than a person suffering from multiple illnesses.

You should also be aware that different insurance companies may charge different premiums for the same types of policies. So choosing the right one at a price you can afford takes some effort.

Policy Limit

It is defined as the maximum amount an insurance company is required to pay for losses covered by an insurance policy. It is determined based on the period (term of the policy), injury or loss, and similar other factors.

Generally, the higher the policy limit, the higher the premium payable. For a life insurance policy, the maximum amount that the insurer pays to the nominee is called the sum insured.


The deductible associated with an insurance policy is the amount or percentage that the insured agrees to pay out of pocket before the insurer proceeds to settle the claim. You can also think of it as holding back on the small, minor claims that many people make under their insurance policies.

Deductibles apply to a policy or claim, as defined by the terms of the particular type of policy. As a general rule, insurance policies purchased at high deductibles are cheaper, as higher out-of-pocket spending results in fewer claims.

See also: Check Out Best Life Insurance Companies in India

How Does Insurance Work?

As defined above, an insurance policy is a legal contract that binds the insured and the insurance company to each other. It has all the details of the conditions or circumstances under which an insured person or policy nominee receives insurance benefits from an insurer.
Insurance is a method by which you can protect yourself and your loved ones from a financial crisis. You buy an insurance policy for the same, while the insurance company takes on the risks involved and offers insurance coverage at a certain premium.

In the event of any unforeseen circumstances, the insured or nominee may file a claim with the insurer. Based on the claims evaluation criteria, the insurer reviews the claim and settles the claim.

Types of Insurance in India

The 4 most common types of insurance that people buy are:

  • Life Insurance
  • Health Insurance
  • Motor Insurance
  • Home Insurance

Benefits of Insurance

Insurance policies benefit both individuals and society as a whole in a variety of ways. Along with the obvious benefits of insurance, others are little discussed.

1. Protection from uncertainties

This is one of the most visible and important benefits of insurance. Insured persons or organizations are indemnified under loss insurance policies. Purchasing the right type of insurance policy is really a way to get protection from the losses that result from life’s various uncertainties.

2. Cash flow management

The uncertainty of out-of-pocket payment for incurred losses has a significant impact on cash flow management. But with an insurance policy, you can easily deal with this uncertainty. The selected insurance company pays in the event of an insured event whenever they occur.

3. Investment opportunities

Unit-linked insurance plan, invest part of the premium in multiple market-linked funds. Thus, they allow you to regularly invest money in order to earn market-related profits and achieve your life goals.

Tax Benefits of Insurance

In addition to the benefits of insurance policy protection, you can also take advantage of income tax benefits.

Section 80C

The premium paid for the purchase of life insurance policies is deductible from taxable income under section 80C of the Income Tax Act. The upper limit for these deductions is around Rs. 1.5 lakh.

Section 80D

The health insurance premium paid to purchase policies for you and your parents is also tax-deductible under section 80D of the Income Tax Act of 1961.

Section 10(10D)

Life insurance premiums that you or the policy candidate receive from an insurance company are exempt from tax under this section.

You can claim these insurance tax credits at the time you file your income tax return.

Get an Insurance to Stay Protected

It is essential to have insurance these days. While many people invest in various types of insurance, not everyone is aware of the many benefits it offers. Insurance, like life insurance, provides a secure and affordable financial future not only for you but also for your family. What’s more, investing in life insurance encourages the regular habit of saving money. Thus, it gives you the opportunity to create a significant collection.

Insurance plans, such as Health insurance plans and Term insurance plans, can help you protect yourself and your family’s financial situation, as well as many other benefits. So, now that you know what insurance is, and how it works, you should think about choosing the one that suits you and stay safe!

Frequently Asked Questions (FAQs)

Q. What are the factors that affect life insurance premiums?

A. The amount of a life insurance policy premium is determined by several factors such as age, gender, health status, income, lifestyle, and occupation. In addition, years without claims can help reduce premiums on certain types of insurance policies.

Q. What is the waiting period for insurance policies?

A. Waiting period refers to the period during which the policyholder must wait before insurance coverage becomes effective. He/she may not receive insurance benefits for claims filed before the expiration of the waiting period or before coverage begins.

Also, this period varies from one type of insurance policy to another.

Q. Why do I need to renew my insurance policy?

A. Insurance policies must be renewed in a timely manner to ensure continued benefit to the insured. They may be renewed during the grace period after the expiration date and may expire if the premium is not paid on time.

Also, the insurance company has the right not to offer insurance coverage for the period for which no premium has been received.

Q. How many claims can I make under my insurance policy?

A. You are only allowed to make a certain number of claims depending on the type of insurance you have purchased. Also, for policies such as health and motor, you can get a bonus/discount next year for not filing a claim on the policy during the year.

Q. What is a cashless payment associated with an insurance policy?

A. Cashless is available with some types of insurance policies such as health and auto insurance. Under this service, insurance companies pay the costs incurred by the insured directly to hospitals or chain garages.

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