Basics of Insurance: When and Why Do We Need it?

Hands protecting a family; symbol of life insurance

Do you know that India has around 1.2 million active armed personnel who take care of our external borders and the internal order? Our defence forces protect our territory from external intrusions and facilitate the free movement of people. Insurance plays a similar role for individuals. And it is important to know why and how before we buy an insurance policy.

An insurance policy works like a soldier that shields us from life’s uncertainties.

It prevents life’s emergencies from intruding into the territory of our investments and saves us from dangerous debt traps.

In the 21st century, life has become increasingly complex. All thanks to changes in lifestyle patterns, the advent of life-threatening diseases such as cancer, HIV Aids, heart diseases, and increased exposure to other external risks such as accidents. To deal with new challenges, we need an excellent safety net for ourselves and our families.

What is insurance?

According to Investopedia, insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.

In simple words, insurance is a protective armour. It shields you financially from shocks affecting your wallet post an unexpected event.

This event can be anything ranging from the death of a family member (possibly the breadwinner), a health emergency such as an accident or surgery, damage to one’s home or vehicle, or any potential risks during travel.

According to a Financial Express report, the health insurance penetration in India is significantly low. 56% of Indians are not covered under any health insurance policy. In contrast to this, 90% of American people are insured with health insurance. This highlights the need to address this issue at the earliest as it is the prime foundation of financial security.

Why buy an insurance policy?

A doctor's desk showing the hands of a woman doctor filling a life insurance form. Phone, laptop, etc are on the desk.
An insurance policy works as immunization against future financial risks

Old Hindi movies very clearly demonstrate the catastrophic effects of the absence of insurance contracts. They often portray someone’s father or the breadwinner dying an untimely death or facing a complex health issue, and their children getting doomed to a poor destiny.

Had there been insurance in the plot, the drama quotient of these films would have significantly reduced. Similarly, if we wish to reduce the drama that unplanned emergencies may bring into our lives, insurance is a must.

Recent years have seen the emergence of various insurance products by both private and government players. An insurance policy serves multiple purposes along with providing a financial guarantee to the insured.

In reality, it saves us from the vicious debt trap which can embrace us once we are out of money. It also provides an extra cushion to our existing investments. In fact, our life goals remain intact even in times of crisis thanks to the correct insurance type.

With a good insurance policy, there is actually no need to liquidate our savings, or emergency funds, or to dip into our liquid investments.

Types of insurance

It’s important to know about the different kinds of insurance available and the different functions they serve.

Hand Picking Wood Block with Word Life Insurance. Business Concept Type of Insurances on Wood Top Block with Word: Life, Home, Car, Travel, Medical and Dental, Personal Accident.
It’s critical to understand the types of policies and their purposes before deciding to purchase or not purchase

1. Life insurance

Life insurance is financial protection for your family in case of your death or payment made to you on your surviving the policy term. It is of utmost importance for survivors in the event of the death of the breadwinner.

2. Health insurance

Health insurance provides financial coverage for medical expenses, in case of a medical emergency. There are multiple benefits that are usually a part of the policy. Some of these are cashless hospitalization, daycare facilities, and coverage for terminal and critical illness. You might want to look at these when choosing a policy for yourself.

3. Vehicle insurance

This is coverage for your vehicle against any financial loss due to an accident or any other damage. This policy covers damages for a third party and third party property along with compensating for our losses as well.

4. Travel insurance

Travel insurance is another insurance cover that takes care of any unforeseen losses incurred during travelling. It covers many important aspects ranging from medical emergency, medical evacuation, damage to/loss of luggage, and so on.

5. Home insurance

Home insurance is a cover against unknown risks to your property such as theft, burglary, earthquakes, floods, fire as well as accidents of family members.

When should you buy an insurance policy?

A young man sitting at his desk looking at his laptop screen and contemplating which product to buy.
Many people wonder when they should start with the insurance, especially health insurance
Though there is no fixed age for buying an insurance policy, starting early has its own set of benefits.

First of all, buying early insurance make our premiums cheaper and allow us to enjoy their benefits over a longer period of time. We know that emergencies can occur without any warning at any age. Therefore, getting insured young ensures a secure and smooth run for us through all phases of life.

Many people are of the opinion that their company health cover is sufficient for dealing with all types of emergencies. Take a look at the weekly expenses of hospitalization. You will get a rough idea about the skyrocketing prices of healthcare. With the increase in lifestyle diseases such as heart disease, cancer, diabetes, and so on getting insured early has become quite important. Also, it is unlikely we will stay with a company forever. In case we leave one company, insurance coverage at the next may differ. In the event one decides to start their own business, or freelance or do any independent consulting, self-insurance is a valuable safeguard.

Is insurance only a tax-saving tool?

Document showing tax related information to indicate how insurance helps to save tax
Several insurance policies also come with tax-saving benefits

Many people opt for insurance as a tax-saving tool. It's true that we can get tax deductions on insurance premiums paid under section 80D of the Income-Tax Act, 1962. It is therefore not surprising that many people choose to pay premiums for their insurance policies to manage their taxes well.

But we have to be careful with such a mindset, as we may lose the opportunity to find the right insurance type that will meet our actual needs. We should understand that tax saving on insurance is an incentive the government provides to encourage us to buy insurance.

The true aim of insurance is to protect you so that your financial health remains stable. This aim must never be compromised on in lieu of tax-saving benefits.


Our financial stability depends hugely on how we manage our financial risks. Insurance is the best tool we can use to transfer our financial risks to a third party. The premium charged on this transfer is the best mobilization of our savings to a safe zone, that too without any major roadblocks.

One word of caution though. When we choose insurance, avoid under-insuring or over-insuring yourself or your family. The right choice of insurance policy and the amount will actually help you to sail smoothly through life’s difficult circumstances with efficient use of resources.

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Disclaimer: This article is for educational purposes only. It should not be considered financial or legal advice. Please consult a financial professional before making any significant financial decisions.