The Meaning Of Insurance
The meaning of insurance is important to understand for anybody that is considering
buying an insurance policy or simply understanding the basics of finance. Insurance is a hedging instrument used as a precautionary measure against future contingent losses. This instrument is used for managing the possible risks of the future.
Insurance is bought in order to hedge the possible risks of the future which may or may not take place. This is a mode of financially insuring that if such a incident happens then the loss does not affect the present well-being of the person or the property insured. Thus, through insurance, a person buys security and protection.
A simple example will make the meaning of insurance easy to understand. A biker is always subjected to the risk of head injury. But it is not certain that the accident causing him the head injury would definitely occur. Still, people riding bikes cover their heads with helmets. This helmet in such cases acts as insurance by protecting him/her from any possible danger. The price paid was the possible inconvenience or act of wearing the helmet; this ie equivalent to the insurance premiums paid.
Though loss of life or injuries incurred cannot be measured in financial terms, insurance attempts to quantify such losses financially. Insurance can be defined as the process of reimbursing or protecting a person from contingent risk of losses through financial means, in return for relatively small, regular payments to the insuring body or insurance company.
Life Insurance provides the dual benefits of savings and security. The following benefits explain why this investment tool should be an integral part of your financial plans.
Advantages of Life Insurance
Risk Cover - Life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event.
Planning for life stage needs - Life Insurance not only provides for financial support in the event of untimely death but also acts as a long term investment. You can meet your goals, be it your children's education, their marriage, building your dream home or planning a relaxed retired life, according to your life stage and risk appetite. Traditional life insurance policies i.e. traditional endowment plans, offer in-built guarantees and defined maturity benefits through variety of product options such as Money Back, Guaranteed Cash Values, Guaranteed Maturity Values.
Protection against rising health expenses - Life Insurers through riders or stand alone health insurance plans offer the benefits of protection against critical diseases and hospitalization expenses. This benefit has assumed critical importance given the increasing incidence of lifestyle diseases and escalating medical costs.
Builds the habit of thrift - Life Insurance is a long-term contract where as policyholder, you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to meet financial needs at various life stages.
Safe and profitable long-term investment - Life Insurance is a highly regulated sector. IRDA, the regulatory body, through various rules and regulations ensures that the safety of the policyholder's money is the primary responsibility of all stakeholders. Life Insurance being a long-term savings instrument, also ensures that the life insurers focus on returns over a long-term and do not take risky investment decisions for short term gains.
Assured income through annuities - Life Insurance is one of the best instruments for retirement planning. The money saved during the earning life span is utilized to provide a steady source of income during the retired phase of life.
Protection plus savings over a long term - Since traditional policies are viewed both by the distributors as well as the customers as a long term commitment; these policies help the policyholders meet the dual need of protection and long term wealth creation efficiently.
Growth through dividends - Traditional policies offer an opportunity to participate in the economic growth without taking the investment risk. The investment income is distributed among the policyholders through annual announcement of dividends/bonus.
Facility of loans without affecting the policy benefits - Policyholders have the option of taking loan against the policy. This helps you meet your unplanned life stage needs without adversely affecting the benefits of the policy they have bought.
Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entry and exit under most of the plans.
Mortgage Redemption- Insurance acts as an effective tool to cover mortgages and loans taken by the policyholders so that, in case of any unforeseen event, the burden of repayment does not fall on the bereaved family.
by: govindam
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