Introduction: Insurance

Here we will discuss the basics of insurance. How do things change? What is a risk profile and what is a premium? What does it change? Regardless of which insurance you are buying.


So, what are the fundamentals of insurance?

First, let us try to understand insurance. What is this product? It is a beautiful and valuable product, and if used properly, you can have adequate protection for yourself. This means that you give an amount to a company. Which is called the insurance company, and we will come to what that amount is called, and you give this amount annually, half-yearly, quarterly, or monthly. And why do you give this amount? Because you want protection. Protection against something that you can’t plan or predict. So, insurance has a basic formula: if x’ happens and ‘x’ keeps changing depending on the kind of insurance you are buying, then give me financial protection. If ‘x’ happens, give me financial protection. For example, if I am hospitalized because of a disease, I have to stay in a hospital, which gives me financial protection, meaning I need aid to bear the hospital’s expenses. If death happens, if I die, then give my family financial protection, meaning if I, as an earning member, die, then my dependents who relied on my income will get financial protection. This is the basic definition of insurance. Now, how this insurance works is that usually, the amount that you have to give for this protection is dramatically lower than the actual amount you are paid when it is x. I will say that once more with an example: many of us must have health insurance; even if not, hopefully after this series you will definitely take it. I will give my example: when I started health insurance, which was about 15 years ago when I was 25 years old, around that time I was 25 years old, around that time I took a cover of 4 lakhs for my parents, myself, and my sister. I was unmarried at that time; there were just the four of us, and I took a four-laks cover. As far as I can remember, 4 lakhs covered 15 thousand annually, and that covered the entire family. As a result, should any of us, God forbid, become ill and require hospitalization, the insurance will cover the cost of our care.. But I have paid only 15 thousand for that for a year; yes, it could happen after 2 or 3 years, but it will take many years to cover 4 lakhs, right? But still, the insurance company is giving me Rs. 4 lacks in coverage for just a premium of Rs. 15 thousand. How does that work? To understand this, let’s first understand definitions.


First, the contract that you do with your insurance company says that if ‘x’ happens, then give me financial protection; that contract is a policy. It’s called a policy. That’s why we say insurance policy, LIC policy, or that policy, so this is called a policy.

There are two fundamental things.

There are two fundamental things about this policy. One is premium. The premium is the amount you give to the insurance company. It could be monthly, quarterly, half-yearly, or annually. You must pay this sum in order to receive the insurance company’s promised level of financial security. Another important thing is cover. Cover means financial protection. To what limit, what scale, and what amount will you get this financial protection? It’s called a cover, meaning how conversed are you? How covered are you? So, let’s talk about the same health insurance. At the age of 25, I took a cover of 4 lakhs, meaning if, in my family, anybody gets hospitalized, then the insurance will bear the hospital bill up to 4 lakhs on my behalf, and for that, I gave a premium of 15 thousand. This is how it works. Now the biggest question that most people have is, That is a fraud! How can you get something worth 4 lacks in 15 thousand? This is possible? Is that a reference to sacred games? I am not going to do this. And that is why, surprise, surprise! In India, very few people actually have insurance, whether life or health. And it is because you are asking for protection for something that has not yet happened to you, and more often than not, you want that it never should, Due to the fact that you are actually paying someone for something you do not desire and that the cover is so large for such a modest price, almost sounds fake. How is this possible? How does this work? So, for that, it is important to understand the business model of insurance companies.

Types of insurance:

Life insurance:

This type of insurance provides a payout (death benefit) to the beneficiaries of the policyholder upon the insured person’s death.

Auto Insurance:

Auto insurance protects against financial losses resulting from car accidents or damage to the insured vehicle.

Homeowners and renters’ insurance:

Homeowner’s and renter’s insurance protects against damage or loss of property due to events like fire, theft, or natural disasters. They also offer liability coverage if someone is injured on the insured property.

Property and Casualty Insurance:

This category includes insurance for businesses, covering commercial property, liability, workers’ compensation, and other risks specific to enterprises.

Travel Insurance:

Travel insurance provides coverage for trip cancellations, medical emergencies while traveling, lost luggage, and other unforeseen events that can disrupt travel plans.

Principles of Insurance:

Utmost Good Faith : Both the insurer and the insured must act honestly and disclose all relevant information when entering into an insurance contract.


Insurance aims to return the insured to their pre-loss financial position. In other words, it should compensate for the actual financial loss suffered without allowing the policyholder to profit from the loss.

Insurable Interest:

The policyholder must have a legitimate interest in the insured property or person.

Proximate Cause:

Insurance covers losses resulting from the proximate or nearest cause of an event. If a covered peril is the primary cause of a loss, it should be reimbursed even if other non-covered perils contribute.


If an insurer pays a claim to the insured, it may take legal action against any responsible third party to recover the amount paid. This principle prevents double recovery by the insured.

Importance of Insurance:

Encourages Savings: Life insurance and certain investment-linked policies can encourage disciplined savings, as they typically have a cash value or investment component.

Economic Stability:

Insurance contributes to economic stability by providing a mechanism for spreading risk across a large pool of policyholders.

Many types of insurance, such as auto and health insurance, are legally required in many jurisdictions.

Peace of Mind:

Knowing that you have insurance coverage can offer peace of mind, reducing stress and anxiety about potential financial hardships.

Leave a comment