Insurance is quite simply protection against the risk of potential significant financial loss in the future. While choosing a policy might initially seem confusing, it is an essential part of organizing your personal finances. An insurance policy is a way of buying financial peace of mind against the uncertainties and risks in life such as untimely death, loss of property, serious health issues requiring heavy expenditure, and accidents among others.

Common insurance terms:

Here are some of the most common terms used in insurance:

Insurer: The party that provides the insurance cover, usually the insurance companies. For instance, in India the insurer would be a company like LIC.

Insured/Policy holder: The party/parties covered by the insurance. Also known as the policy holder/s, this refers to the customers who buy the policy i.e. – like you.

Insurance Policy: A written contract that is the legal basis of the insurance agreement. All insurance payments are made on the basis of the terms laid down in the insurance policy.

Premium: The money that the policy holder has to pay periodically – it is calculated based on the expectation of the loss.

Life insurance: Let’s take the example of one of the more popular types of insurance in India - life insurance. What does this mean to the individual in terms of loss and risk? If you are the main breadwinner and worried about your family’s ability to support themselves in case you die unexpectedly, you can take out a life insurance policy and name a family member as a beneficiary. In case of untimely death, a pre-fixed lump sum (the amount that you have been insured for) will be paid out to your beneficiary.

Additional Reading: 5 Best Term Insurance Plans in India

Health insurance: This is the case with health insurance as well. With medical bills rising steeply every day, you might be worried that in case of a medical emergency or serious medical condition, you will not be able to afford the expenses. When you take out a health insurance policy that reimburses a certain amount of medical-related expenses, you can breathe easier knowing that your medical bills will be taken care of. Of course, the amount that you will receive depends on the particular policy you have bought, but in general, having insurance gives you some protection against potential financial loss in the future.

Auto insurance: This is mandatory when you buy a vehicle in India.

Insurance companies in India: Life Insurance Corporation of India (LIC) is the biggest life insurance company in India. There are four other government insurance companies in addition to several private sector companies. You should choose your insurance policy based on not only the cost of premiums, the coverage given but also the reputation of the company and their record of settling claims.