RESUME APPLICATION PAY PREMIUM
Fund Performance

Fund Performance

Knowledge Center

Knowledge Center

About Us

About Us

Tools and Calculators

Tools & Calculators

Quick links

Mobile (Download app)
  • Webpages
  • Documents
  • HDFC Life ClassicAssure PlusInvestment
  • HDFC Life ClassicAssure PlusInvestment
  • HDFC Life ClassicAssure PlusInvestment

For NRI Customers

(To Buy a Policy)

(If you're our existing customer)

For Online Policy Purchase

(New and Ongoing Applications)

Branch Locator

For Existing Customers

(Issued Policy)

Fund Performance Check

RESUME APPLICATION PAY PREMIUM

What do you want to do?

Quick links

Mobile (Download app)

Download HDFC Life App

Buy plans, track your policy, make renewal payments & monitor fund performance with HDFC Life App, Download Now!

Apple Logo Go to Google Play Store

What is Insurance? 

An insurance policy is a legally binding agreement between an insured individual (also called a policyholder) and the insurance company (also called an insurer). Under this contract, the insured person receives financial protection from the insurer for losses suffered under specific circumstances. ...Read More

Get a Free Quote
call-icon :1800-266-9777
(ALL DAYS, FROM 9AM TO 9PM, TOLL FREE)
Talk to our Advisor

ROP

Return of Premium^

Same Day

Claim Processing#

99.50%

Claim Settlement Ratio##

Rishab Pant buy term Insurance
Lives Insured

66 Million

Lives Insured@

Assets under management

₹3 Trillion

Assets under
management@

Total Premiums

630 Billion

Total Premiums@

TERM INSURANCE PLANS BUYING GUIDE

Why Is Insurance Necessary?

What is Insurance – Definition, Types and Benefits
December 20, 2024

Table of Content

 

An insurance policy is a legally binding agreement between an insured individual (also called a policyholder) and the insurance company (also called an insurer). Under this contract, the insured person receives financial protection from the insurer for losses suffered under specific circumstances.

By choosing an insurance policy, the insured individual must pay premiums to the insurance company on a regular basis. In return, the insurer pays an assured sum of money to the policyholder in certain events involving losses for the policyholder.   

There are primarily two types of insurance- life insurance and general insurance. The former pays out a certain sum of money in the event of a policyholder’s death to his/her loved ones. General insurance includes car insurance, health insurance, home insurance, etc., where the insurer covers the loss of non-life assets.

Why Is Insurance Necessary?

Insurance is necessary as it enables you to protect yourself and your family members during times of need. It also offers you financial assistance in case of an accident or disaster or the loss of assets such as your home or car. Thus, it covers any immediate expenses and provides you with financial security and stability in the long run.

Here are the underlying reasons in detail behind the importance of insurance:

  • Provides Financial Stability

Opting for insurance provides you and your family's financial stability and covers expenses such as housing, education, groceries, and more. Alongside this, it assists you financially during any unfortunate incident and meets all immediate costs.

  • Long Term Wealth

Insurance plans allow you to generate wealth over time. Some particular plans provide you with investment opportunities and allow you to save, thereby securing your financial future. Other than this, life insurance enables you to meet financial goals relating to your child's higher education, retirement, etc.

  • Promotes Economic Growth

Insurance provides financial assistance to family members during your sudden demise. Thus, it acts as a safety net for your loved ones and provides access to necessary resources. The insurance payout can further be utilised for business investment, buying real estate, and other purposes.

How Does Insurance Work?

Insurance policy works on the simple principle of covering expenses that arise out of loss of life, disasters, accidents, injuries, etc. While life insurance provides a fixed sum assured to your beneficiaries, general insurance covers the loss of various assets, such as homes, vehicles, travel-related losses, etc.

1. Premium

This is the sum amount that is mandatory for every policyholder to pay to the insurer during a particular time period. The premium is actually the cost of an insurance policy and depends on several factors. These factors include health conditions, age, smoking habits, and others.

2. Sum Insured

The sum insured is the required amount that every insurance company is mandated to pay to the policyholder during any unavoidable events that include medical emergencies and other critical illnesses. This paid amount is, however, not any fixed sum of money like the sum assured and only covers the losses you have incurred.

3. Sum Assured

This is the amount every insurer must pay during an insurance claim. This is a fixed sum of money that the insurer has to pay to the insured person's beneficiaries in the event of his or her death.

In a life insurance plan, the sum assured is also termed as life coverage. In the case of a ULIP plan, the assured sum amount equals the principal life coverage along with the benefits provided at the time of policy maturity.

Insurance Components

Whether or how insurance will benefit you depends on its components. Thus, understanding insurance is easier when you know these components well. Following are their details.

Insurance premium: An insurance premium is the amount you need to pay for a certain period to get insurance cover. This can be paid in a single time, for a limited period within the policy term or in a regular pay format. The regular pay premiums can be paid in an annual, half-yearly, quarterly or monthly schedule. It is the premium that binds the contract and makes the insurer cover your losses. Usually, higher coverage is available with higher premiums and vice versa. However, the amount of premium is calculated based on certain other factors. For example, the age, gender, health condition, family history, lifestyle and occupational type of the policyholder are determinants of the premium in the case of life or health insurance.   

Policy limit: Policy limit is the maximum compensation or cover the insurer is liable to pay for certain losses. However, this applies to health and general insurance policies only. Life insurances have a pre-defined sum assured payable in case of the policyholder’s death within the policy term.

Deductible: Deductible is also a component specific to general or health insurance only. It is the maximum portion or percentage of money the policyholder pays out of pocket before the insurance company steps in to settle the claim. Here, the insurance company makes a payout only when the loss or expense incurred is greater than the deductible. Thus, the higher the deductible, the lower the corresponding premium for the policy. This happens because bigger out-of-pocket expenses often result in fewer claims.  

Types of Insurance

There are various kinds of insurance available in India to address the risk of unfortunate situations like death, accidents, health emergencies, theft and damage to houses or vehicles due to calamities and accidents. In addition, certain insurances can act like an investment opportunity too.

Going by the meaning of insurance, broadly the policies can be divided into two major categories: Life insurance and General or Non-life insurance. The following table divides various types of insurance plans into these two categories.   

Here are the different types of insurance to look into:

Life Insurance

Term Insurance

Term insurance is a kind of life insurance that offers comprehensive life coverage for a particular period. It covers only death benefits. The premium paid for this plan is, however, the cheapest in comparison with other life insurance plans when purchased online. Some term plans also cover critical illnesses and diseases such as kidney failure, cancer, and others.

Whole Life Insurance

Whole life insurance is a kind of life insurance that offers life coverage till the death of the policyholder. Considering your financial needs and risk appetite, you can choose a participating or non-participating whole-life plan. The premiums paid for this plan are quite expensive. These plans typically cover death benefits only.

Unit Linked Insurance Plan (ULIP)

A Unit Linked Insurance Plan is a type of insurance policy that is a dual combination of insurance and investment under a single plan. With it, a policyholder can avail both life insurance coverage as well as invest in the market. When you purchase a ULIP plan, a portion of the premium provides you with life insurance coverage while the remaining amount is invested in funds that include debt, equity, or a combination of both, considering your risk appetite.

Money-Back Policy

Money-back policy is one of the most popular types of life insurance plans where a policyholder receives returns after a predetermined period. Once your policy reaches maturity, you get the sum assured plus applicable bonuses. During the policy tenure, if there is a sudden demise of the policyholder, the beneficiaries then receive the sum assured amount.

Term Insurance with Return of Premium (TROP)

Term Insurance with Return of Premium (TROP) is a type of term plan that offers more comprehensive coverage to beneficiaries than a standard term plan. It also provides a lucrative payout on maturity. In other words, if the insured individual serves the policy tenure, the premiums are paid out to policyholders at the end of the policy. In case the policyholder dies, the beneficiary receives the death benefit.

Endowment Plan

An endowment plan is a kind of life insurance policy offering dual benefits of life cover and savings. It provides comprehensive life coverage with investment or savings features and provides a lump sum amount upon the sudden demise of the policyholder. It helps a policyholder build the habit of savings even while assisting financial security to family members. If the insured individual survives the policy tenure, a lump sum amount is provided to the policyholder.

Child Plan

A child insurance plan is a kind of insurance designed specifically to provide financial security for a child in the future. This is a long-term investment that allows parents to shape their child's dreams through long-term investments. It provides dual benefits of insurance coverage and savings, securing a child's future expenses, including marriage, educational expenses, and other significant life events.

Retirement Plan

As the name suggests, a retirement plan provides a permanent source of income during years of retirement. Insurance companies usually provide a defined pension amount (called annuity) for the rest of the insured person’s life after retirement. Retirement plans also offer death benefits. Thus, if there is a sudden demise of the policyholder, their beneficiaries receive the sum assured.

General Insurance

Health Insurance

Health insurance is an important tool that offers you financial assistance during any medical emergencies. It covers medical expenses, including treatment costs, medicines, doctor fees, hospital room rent, etc., up to a certain limit called the sum insured. Three different types of health insurance, considering their coverage, are group health insurance, individual health insurance, and family floater health insurance plans.

Home Insurance

Home insurance is an insurance plan providing financial coverage for damage to your home from manmade disasters, natural calamities, and other causes. It can also cover liabilities caused due to theft, flood, fire, earthquakes, etc. Home insurance not only provides you with financial protection but also protects you financially from the loss of your valuables. Some types of home insurance include public liability coverage, home structure insurance, etc.

Auto Mobile Insurance

When buying a vehicle in India, it is mandatory to get motor insurance. Motor insurance assures complete financial security of your vehicle against physical damages and third-party liabilities. Considering the different categories of vehicles, motor or automobile insurance is broadly classified into three types which are two-wheeler, car, and commercial vehicle insurance. There are other add-on coverage you can include with a motor insurance policy.

Travel Insurance

Travel insurance offers financial protection to you and your family members while travelling in domestic or abroad. If you suffer any losses due to the loss of a passport, delay in flights, accidents, adventure sports, or loss of baggage, this insurance safeguards your finances. This type of insurance plan provides cashless hospitalisation if you need to be hospitalised during travelling.

Pet Insurance

Pet insurance provides financial coverage for the health of your pet and medical conditions such as pregnancy complications, insect-borne diseases, dental treatments, and others. In addition, it covers other damages such as loss caused to a third party because of a pet, overseas coverage, accidents, pet theft, and more. Like us, pets also need insurance.

Mobile and Laptop Insurance

As the name suggests, mobile and laptop insurance provides coverage to mobile phones and laptops from accidental damage. The insurance company provides compensation for repairing the screen of gadgets damaged during any accident. Buyers can opt for this insurance plan for both old and new gadgets. They cover theft, liquid damage, electrical breakdowns, cracked screens, etc., depending on the terms of the policy.

Features of Insurance

Choosing the right insurance plan provides financial assistance to businesses and individuals to manage their potential losses. Here are some common features of insurance:

  • Risk Coverage

This is the first and most important insurance feature. An insurance plan offers financial protection during emergencies such as accidents, damage, critical illness, and others.

  • Premium Payment

Payment of premiums is mandatory for policyholders to keep their insurance plan active. The premium amount, however, depends on a policyholder’s age, health conditions, level of risk and the policy’s coverage.

  • Settlement of Claims

In the event of losses and damages, policyholders file claims to obtain the insurance payout. On-time and fair claim settlement is one of the important features of insurance.

  • Tax Benefits1

Premiums paid for insurance are subjected to tax deductions under Sections 80C and 80D of the Income Tax Act. Furthermore, life insurance payouts are tax-exempt under Section 10 (10D) of the Income Tax Act.

What are the benefits of insurance?

There are several benefits of purchasing a policy and getting insured. They are:

Financial protection:

The life insurance policies act as a financial backup for the policyholder’s family and save them from monetary struggles if he/she dies an untimely death.

Safeguarding of funds: 

Health insurances offer cashless treatment or reimbursement of medical expenses. Protecting the funds, such a plan saves the policyholder and family from financial hazards.

Growing wealth:

Plans like ULIP or capital guarantee solutions help the policyholder grow his/her wealth by fetching market returns.

Wealth restoration:

Retirement plans help in creating a corpus for retirement when you are no longer able to work or earn a regular income.

Mental peace:

Knowing that your family, property or vehicle is protected against financial losses is sure to take some of your worries away.

What’s Not Covered in Insurance Policies?

To gain a better understanding of what's not covered in insurance policies, let's look at the list of exclusions for life insurance, health insurance, and motor insurance in detail:

1. What’s Not Covered in Life Insurance

A life insurance plan provides financial assistance to you and your family members at an affordable cost. In case of your sudden demise, your loved ones will receive death benefits. However, there are specific deaths not covered by life insurance policies in India. Please note that exclusions may vary by insurer, so it’s essential to review specific policy terms.  Some of the common death exclusions for life insurance are:

  • Due to drinking and driving a vehicle
  • Due to pregnancy and childbirth
  • Due to participation in any dangerous event
  • Due to active participation in an illegal activity

2. What’s Not Covered in Health Insurance

There are some diseases that are not covered by most health insurance policies. The insurance company has the full right to reject those claims. Thus, before you finalise a health plan, make sure to do proper research and planning. Accordingly, select a policy offering the maximum coverage at the lowest price.

The diseases typically excluded from a health insurance plan include undeclared pre-existing diseases, cosmetic surgeries, infertility treatment, self-inflicted injuries, pregnancies, alcohol consumption, and others.

3. What’s Not Covered in Motor Insurance

The list of common exclusions for motor insurance includes regular wear and tear of the car, damage and loss of belongings, driving without carrying essential documents, accidents caused due to violating traffic rules, non-renewal of car insurance policy, and more.

Additionally, if you lend your car to someone else and it causes your car to be damaged, the insurance company will not honour your claims. Similarly, if you use your car for any illegal activities, any claim arising from it is not covered under a car insurance policy.

FAQs on What is Insurance

Q. What is insurance in simple words?

Insurance in simple words is an agreement between the policyholder and the insurance company. Under this contract, the insurer pays the insured a certain assured sum in specified situations to cover the financial losses incurred.

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

The life insurance premium calculation depends on several factors. Alongside the coverage amount and policy tenure, the age, gender, health condition, medical history, lifestyle and occupation details of the policyholder affect the amount of premium.

Q. What is the waiting period under insurance policies?

The waiting period under an insurance policy is the time from the activation of the policy until you start getting the policy benefits. This feature is typically associated with health insurance.

Q. Why do I need to renew insurance policy?

You need to renew the insurance policy to keep it operational and avail of the policy benefits.

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

As per industry experts, there is no particular restriction on the number of claims under a general insurance policy.

Q. What is a cashless facility related to an insurance policy?

 A cashless facility is typically designed for health insurance policies. Medical insurance comes with a network of hospitals who have a tie-up with the insurance company. If you get treated in the hospitals of this network, no expense needs to be paid out of pocket up to a specified limit. 

Q. What are the 7 fundamentals of insurance?

The seven fundamentals of insurance include insurable interest, utmost good faith, contribution, subrogation, indemnity, loss minimisation, and proximate cause.

Q. What is insurance risk?

An insurance risk is the threat that a particular insurance company has agreed to insure. In other words, it is the possibility of damage, loss, and injury against which a policyholder can file insurance claims.

Related Articles-

Talk to an Advisor right away

Not sure which insurance to buy?

Talk to an
Advisor right away

Talk to an Advisor right away

We help you to choose best insurance plan based on your needs

Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

LinkedIn profile
Author Profile Written By:
Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

LinkedIn profile
Reviewed By Reviewed By:

Here's all you should know about life insurance.

We help you to make informed insurance decisions for a life time.

Why Is Insurance Necessary?

Why Is Insurance Necessary?

Learn the essentials of what is insurance, its types, benefits, and how it protects your finances. Get insights into life and general insurance policies today.

How to Take a Loan Against Life Insurance Policy?

What are the key differences between Life and General Insurance?

How to withdraw PF and EPF after leaving the job?

PF or EPF withdrawal can be done either by submission of a physical application for withdrawal or by an online application using UAN. Read here to know more about it.

How to withdraw PF and EPF after leaving the job?
HDFC life
HDFC life

HDFC Life

Reviewed by Life Insurance Experts

HDFC LIFE IS A TRUSTED LIFE INSURANCE PARTNER

We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.

Popular Search

Popular Searches

Disclaimer

^ Available under Life & Life Plus plan options

#Provided we have received all the relevant and required documents and no further investigation is required. Claim settlement process would be completed within stipulated timelines once the claim request is approved

##Individual claim settlement ratio by number of policies as per audited annual statistics for FY 23-24

@As per integrated annual report FY23-24, available on www.hdfclife.com. As of May 2024

ARN: DM/10/24/17061

down-arrow