Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company.
A pool is created through contributions made by persons seeking to protect themselves from common risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool.
Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type.

Definition
Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.

The party bearing the risk is known as the insurer or assurer and the party whose risk is covered is known as the insured or assured.

Concept of Insurance / How Insurance Works

The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool

of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the

pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

WHY SHOULD I BUY INSURANCE?
All assets have some economic value attached to them. No person can deny that there is also a possibility that these assets may get damaged/destroyed or become non-operational due to risks like breakdowns, fire, floods, earthquake etc. Different assets are exposed to different

types of risks like a car has a risk of theft or meeting an accident, a house is exposed to risk of catching fire, a human is exposed to risk of death/accident. Insurance is needed because of following reasons:

Social Security Tool

Insurance acts as an important tool providing a sense of security to the society on a whole. It is the right of every human-being to have basic amenities like food, clothing, housing, medical care, standard of living necessary for his personal and family is well being, and right to security in case of unemployment, disability, sickness or any other circumstances out of his control.

In case the bread earner of a family dies, the family suffers from direct financial loss as family is income ceases. As a result, family is economic condition gets affected unless there are other arrangements to rescue the family from this situation. Life insurance is one alternate arrangement that offers some respite to the family from financial distress. Otherwise this family would have been pushed into the lower strata of the society, which would be an additional cost to the society. This is because subsidies would have to be given to the family so as to enable it to survive and enjoy the basic rights at par with other people. Moreover, a poor family is generally seen to have a large family size with family members being illiterate. This on a whole affects the society and is a cost to the society. Therefore, insurance compliments the state in social management efforts.

Uncertainty
The basic need of insurance arises as risks are uncertain and unpredictable in nature. Getting insurance for an asset does not mean that the asset is protected against risks or its exposure to risk is reduced, but it actually implies that in case the asset suffers any loss in value due to such risk, the insurance company bears the loss and compensates the insured by making payment to him.

Economic Development
The premium paid by people to the insurance companies is a part of their savings. Insurance, thus, acts as a useful instrument in promoting savings and investments, particularly within the lower-income and middle-income families. These savings are ultimately used as investments fuelling economic growth.

General Purposes of Insurance
Insurance is widely popular and beneficial because of its following general purposes:

These plans are best suited for people aged upto 35 years as it provides higher protection at low cost.

These plans are also beneficial for a person whose income is low and want to secure their family from financial default in case of his death.

Protection or safety (Term insurances)
Marriage or education of the child (Children plans)
Speedy growth of money & risk cover (Unit Linked Plans)
Saving and Protection (Endowment type plans)

Life Insurance for Tax Benefits

Purchase a life insurance policy which you feel is suitable for you as it not only offers you protection but also offers tax benefits under Section 80C of the Income Tax Act, 1961 and Section 10(10D) of the Income Tax Act, 1961.

There are many life insurance plans out there from various insurance companies that can help you save on tax under various sections of the Income Tax Act, 1961.

Tax can be saved by way of deductions and exemptions, as explained below.

Saving on Tax with Life Insurance:

Deductions:

Section 80C:

There are many investments that can help you save on tax under Section 80C, the most popular and beneficial of which is investing in a good life insurance policy.

• This deduction is available for individuals and Hindu Undivided Families (HUF).
• The maximum amount that can be exempted from taxation under Section 80C, 80CC and 80CCE is Rs.1,50,000.
• Deductions are only allowed for Premiums up to 20% of the Sum Assured, if the amount of Premium paid in a particular financial year for a policy is in excess of 20% of the actual Sum Assured. This is relevant only to policies that were issued before 31 March 2012.
• In the case of insurance policies issued on or after the 1st of April, 2012, the deductions are only allowed for so much of the premiums payable as don’t exceed 10% of the actual capital Sum Assured.
• If the benefit has been claimed under this section, and the policy has been terminated or annulled within 2 years from the commencement of the policy, the benefit will be reversed. This is relevant to all life insurance policies, except ULIPs.
• If the benefit has been claimed under this section, and the ULIP has been terminated or annulled within 5 years from the commencement of the ULIP, the benefit will be reversed.

Exemptions:

Section 10 (10D):

• Any amount received under a life insurance policy qualifies for this deduction. A sum received could be:

• Sum allocated by way of bonus
• Survival benefit
• Maturity benefit
• Surrender value
• Death benefit

• This deduction also applies to proceeds and gains from a ULIP.
• The policy proceeds will be taxable under the following circumstances:

• Payouts on annuity or pension plans.
• Group life insurance plans sponsored by employers.
• Policies bought between the 1st of April 2003 and the 31st of March 2012, whose premium in any year is more than 20% of the Sum Insured.
• Policies bought after 1st April 2012, if the premium in any year is more than 10% of the Sum Insured.
• Policies bought after 1st April 2013 for disabled people or those suffering from ailments as under Section 80DDB, if premiums on these policies are more than 15% of the Sum Assured.

The conditions above do not apply to death claims, or any amount received on the death of the life insured.

• There is no cap on maximum deduction allowed under Section 10 (10D).

* The above data is taken from the Income Tax Act, 1961, and tax laws are subject to change. Please check the latest information of tax saving instruments under the abovementioned sections before making any financial decisions. Check with your insurance provider on the tax saving opportunities under various sections before signing your policy document.