What is insurance: A simple and complete guide for students

In life, unexpected events can happen at any point of time. People can get sick, cars can get damaged, homes can get affected by natural disasters, or sometimes, things just go wrong. In situations like these, there is something that helps people manage risks and reduce financial losses. It is called insurance.

Even though you may not need insurance as a student just yet, understanding what it is and how it works is an important part of becoming financially smarter. Through my blog, I will explain the concept of insurance in a simple manner so that you can appreciate how it protects people, families and even businesses.

Let us begin by understanding what is insurance. At its core, insurance is a financial arrangement where you pay a small amount of money regularly (called a premium) to protect yourself against large, unexpected losses in the future. In practical terms, you pay a company (say an insurance provider) to cover certain types of risks like accidents, illnesses, or theft. If that bad event happens, the insurance company pays you or someone on your behalf (whom you nominate beforehand) to reduce the financial impact. If nothing bad happens, you do not get the money back. But then at least you had protection and peace of mind.

Why people need insurance

Life is undoubtedly, full of uncertainties. As we grow, so do our responsibilities towards our family. We do not know when we might face an emergency. Insurance helps people protect their finances, reduce stress in emergencies, recover faster from losses and ensure the safety for their loved ones. For example, if someone falls seriously ill and needs expensive treatment, then health insurance helps cover the hospital bills. If someone’s car is damaged in an accident, car insurance can help pay for repairs. If a family’s home is damaged by fire or flood, home insurance helps rebuild or replace it.

In the absence of insurance, people might have to use their savings or borrow money, sometimes even go into debt, to handle these difficult situations.

How insurance works

Insurance works on the basic principle of risk-sharing. Many people (called policyholders) pay premiums to the insurance company. The company pools this money and uses it to pay claims to the few people who actually experience the covered events. Let us understand this with the help of a simple example. Imagine a situation in which 1,000 people each pay Rs 100 a year for accident insurance. This will give the company Rs 1,00,000. Now if only 20 people end up needing help due to accidents, then each one gets Rs 4,000. That is Rs 80,000 paid out in claims, and the rest covers company costs and profit.

This system ensures that everyone to be protected while only paying a small amount.

Key terms in insurance

Here are some important words and their meanings that we must know:

• Premium: The amount you pay regularly (monthly, yearly) for insurance.

• Policy: The contract that explains what the insurance covers and what it doesn’t.

• Coverage: The protection the insurance gives you.

• Claim: A request you make to the insurance company when something bad happens.

• Deductible: The amount you must pay yourself before insurance kicks in.

• Beneficiary: The person who gets the money from the policy (common in life insurance).

Types of insurance

Insurance can be of many types. The most common ones are:

a). Health insurance: This covers medical costs like hospital stays, surgery, doctor visits, and medications and helps families avoid high medical bills.

b). Life insurance: This pays money to the family or chosen person if the insured person passes away and helps provide financial security for loved ones left behind.

c). Vehicle (auto) insurance: This covers car or bike damage due to accidents, theft, or natural disasters and often is legally required if you own a vehicle.

d). Home insurance: This protects your home and belongings from damage due to fire, theft, floods, and the like.

e). Travel insurance: This covers medical emergencies, lost luggage, trip cancellations, and more while you travel.

f). Education or student insurance: Some universities offer plans that cover student health, study interruptions, or travel for international students.

How to buy insurance

Insurance can be bought from insurance companies (directly through websites or agents) or through banks or financial institutions or even online insurance marketplaces. When buying insurance, you should always compare coverage and premium options, read the policy terms and exclusions and choose based on your needs and lifestyle. It is not always about picking the cheapest plan, but the one that gives the best protection.

What insurance does not cover

Remember that insurance does not cover everything. Every policy has exclusions, which are things it does not protect against. For example, a car insurance policy may not cover damage due to racing. A health insurance may not cover cosmetic surgery or a travel insurance may not cover pre-existing illnesses unless declared. It is for these reasons that it is said that you must always read the policy document carefully so you understand what is included and what is not.

A common question which is asked is “is insurance a waste of money if nothing happens?”. Well, the answer is no. Think of insurance like a safety net. You hope you never need it, but if something goes wrong, you will be thankful it is there. Just like we wear helmets while riding bikes, or seatbelts in a car, we surely do not plan to crash, but we protect ourselves just in case.

Insurance also plays a big role in the overall economy. It helps reduce the burden on government programs during disasters. It protects businesses from closing down after unexpected losses. It creates jobs in the financial sector and encourages risk-taking and innovation, because people know they have protection. In many countries, having certain types of insurance (like health or vehicle insurance) is required by law precisely for this reason.

Why should students understand insurance

Even if you are still in school or college, learning about insurance is part of becoming a financially responsible adult. It teaches you to plan ahead, protect yourself, and think long-term. In the future, when you buy your first bike or car, travel to study or work abroad, start a family, or even start your own business, you will need to make smart choices about insurance. So, start by talking to your parents about what insurance your family has and I am sure that you will learn a lot just by asking questions.