You have to understand how insurance is fundamentally designed to serve you before you buy. You will also know why and how a fair comparison of premium vs coverage/benefits is important before you decide to buy.
The structure of insurance as a contract lies on three strong pillars,
- A Promise – The Insurer promises to cover your losses due to unforeseen events as specified in the Insurance policy. For example, covering cost of hospitalisation due to specified illnesses in a health insurance policy or covering the cost of accidental repair in your car insurance policy.
- Unforeseen Events – The promise holds good only for those events or group of events, which are specified/named in the insurance policy. It is normally called as a set of benefits or coverage clearly spelt out in the insurance policy.
- Terms and Conditions – And the Promise will be honored subject to a list of terms and conditions mentioned in the insurance policy. The standard terms, conditions and exclusions (those which are not covered) will be detailed in the ‘Policy Wording’.
So, you need to understand the coverage/benefits, terms, conditions and specified exclusions to an extent possible, before you choose to buy your insurance policy.
We would like to give a simple perspective below for you to understand how you have to approach buying an insurance policy.
What is a promise and an unforeseen event? And how they are subject to certain terms and conditions.
Let us take the case of a car insurance policy.
Promise: IDV or Insured’s Declared Value is the value of the car that you choose and the insurer agrees to the value and promises to pay an amount equivalent to the IDV in case your car is damaged due to major accident and it is not repairable. Though you choose the IDV, the insurer is at his liberty to accept it while you propose the IDV. All insurers have their internal underwriting policies related to acceptance of IDV. They will not agree to any IDV, which is widely higher, or lower than their acceptable limits.
Unforeseen Event and a loss: The major accident where the car undergoes irreparable damage due to an accident is called a Total Loss Condition. The insurer’s surveyor has to certify that the damage is irreparable for the insurer to declare the Total Loss Condition.
Terms and Conditions: This promise, to be honoured, is subject to several terms and conditions. For example, one such condition is that the driver of the car is expected to hold a valid driving license. If the driver of the car did not hold a valid driving license when the accident occurred, then it is considered breach of contract.
One basic principle of insurance is that the insured person is expected to take utmost care while using the car that is insured. And also, the insured person should not act against the prevailing law of the land. In this case of not holding a valid driving license, the insured person has violated the principle as well as Motor Vehicles Act. Hence, even if the car is declared Total Loss, the claim will not be payable.
The above example is one of several probable scenarios.
While buying insurance policies, it is very important to check
- Coverage/Benefits Promised – eg. Sum Insured, IDV, Add-on Covers, etc.
- Types of unforeseen losses covered – eg. Disease lists in health insurance, Burglary, Fire, Engine damage due to water ingress in car insurance, etc.
- Terms, conditions and exclusions – eg. Room Rent limit, Proportionate deduction, Sub-limits, excluded diseases, pre-existing diseases in health insurance, Depreciation, conditions for accessories in car insurance, etc.
Comparison should always be Premium vs Coverage
Based on the above premise, you need to compare the premiums offered by various insurance companies only on the basis of coverage/benefits, types of losses covered along with exclusions, terms and conditions before buying.
Online comparison websites give a fair presentation of premium vs coverage comparison, making it easier for you to understand quickly and make an ‘informed buy’ of your insurance policies.