Skimccauley Uncategorized A Beginner’s Guide to Insurance

A Beginner’s Guide to Insurance

Having the correct type of insurance is central to sound financial planning. Many of us may have some form of insurance but very few really know very well what it is or why one must have it. For most Indians insurance is a form of investment or a superb tax saving road. Ask an average person about his/her investments and they’ll proudly mention an insurance product as part of their core investments. Of the approximately 5% of Indians that are insured the proportion of those adequately insured is much lower. Very some of the insured view insurance as purely that. There is perhaps no other financial product that has witnessed such wild mis-selling at the hands of agents who are over enthusiastic in selling products linking insurance to investment earning them fat commissions.

What is Insurance?

Insurance is a way of spreading out significant financial risk of a person or business thing to a large group of individuals or business entities in the Medicare supplementals occurrence of an unfortunate event that is predefined. The cost of being insured is the monthly or annual compensation paid to the insurance company. In the most natural form of insurance if the predefined event does not occur prior to the period specified the money paid as compensation is not recovered. Insurance is effectively an opportunity of spreading risk among a pool of people who are insured and brighten their financial burden in the event of a shock.

Sum assured

In Life insurance this is the amount of money the insurance organisation promises to pay when the insured is disapated before the predefined time. This does not include bonuses added in case of non-term insurance. In non-life insurance this guaranteed amount may be called as Insurance policy.


For the protection against financial risk an insurance organisation provides, the insured must pay compensation. This is known as premium. They may be paid annually, quarterly, monthly or as decided in the contract. Total amount of premiums paid is many times lesser than the insurance policy or it wouldn’t make much sense to look for insurance at all. Factors that determine premium are the cover, number of years which is insurance is sought, age of the insured (individual, vehicle, etc), to mention a few.


Certain plans may offer additional features as add-ons independent of the actual cover. These can be availed by paying extra premiums. If those features were to be bought separately they would are more expensive. For instance you could add on a personal accident biker with your life insurance.

Give up Value and Paid-up Value

If you want to exit an insurance plan before its term ends you can you should stop it and restore your money. The amount the insurance organisation will pay you in this case is called the give up value. The policy ends to exist. Instead if you just stop paying the premiums mid way but do not withdraw money the amount is called as paid-up. At the term’s end the insurance organisation pays you equal in porportion of the paid-up value.

Now that you know the terms this is how insurance works in plain words. An insurance company costly premiums from a large lot of people who wish to insure against a certain kind of loss. With the help of its actuaries the company appears with statistical analysis of the probability of actual loss happening in a certain number of individuals and repairs premiums taking into account other factors as mentioned earlier. It works on the fact that not all insured will suffer loss at the same time and many may not suffer the loss at all within the time of contract.

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