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Understanding the basics of insurance

Investment basics of insurance

Understanding the basics of insurance

When it rains, we carry the umbrella around as it protects us from being drenched against rains.  Similarly, while managing your finances, there is an umbrella that can financially protect you and your loved ones against any financial calamity. This umbrella is called insurance. The way that you do not generally purchase an umbrella in the middle of the rainy season but sufficiently before to ensure that you get optimal protection, insurance too is best bought sufficiently before any financial risk event to ensure that you are able to properly reap the benefits of the cover offered.

Over the next 3 minutes, let us make you aware of some of the basics of insurance so that you can make informed decisions about this financial protection product.

Reduce risk

You can be in a bullet-proof car but there will always be some risk of the card getting overturned. You can lead an extremely healthy lifestyle and work out regularly, but risks like personal accident exist irrespective of your health condition. The point to understand here is that no matter how hard you try, there will always be some risk in our activities. It important to accurately know the various risks that can arise over the course of your life.

There are two kinds of risk: Tolerable risk & non-tolerable risk.  For example, we can afford to lose our wallet containing a few hundred or thousand rupees and that’s tolerable. But, we cannot afford our car, worth lakhs, or our home to be lost or suffer damage in the same way. At its core, insurance is all about risk mitigation. For risks that go beyond our tolerance level, insurance products offer a way to seek coverage against specified events/conditions. Click here to stay protected with a comprehensive suite of insurance solutions that Standard Chartered brings to you from their insurance partners.

Premium explained

To purchase insurance, you need to pay a premium. Be it an insurance cover that is triggered by your death, or one that is activated after you report a hospitalization, the premium is the cost for the customer/policyholder. The premium can be collected annually, semi-annually, quarterly or even monthly. The premium from each customer is pooled and, in this way, a risk cover to every customer is provided to all customers individually. In short, the premium you pay is the cost of mitigating/eliminating the financial risk. Want to check out which plans from the insurance partners of Standard Chartered allow online premium payments? Here is a list.

If the eventuality that the risk event for which you are insured, actually happens, the insurer pays a claim to you. The beauty of the insurance system is that the premium in a year is a fraction of the total claim you can make. For instance, a healthy 35 year old non-smoker male, can get a term insurance plan offering a cover of Rs 1 crore by paying about Rs 1,000 per month. So, if the policyholder, unfortunately, dies in the 3rd year after paying 3 premiums (Rs 1000×12×3 = Rs 36,000), their family would be able to get the Rs 1 crore claim amount in return for the Rs 36,000 insurance premium already paid. The insurance company is able to pay out these amounts by engaging in what is called risk pooling. Find out more about term insurance plans.

Covering many people

How can an insurance company pay Rs 1 crore claim by collecting Rs 36,000 as premium? We know you may be thinking about this question.

Insurance companies group large numbers of people all together to cover losses. Not everybody covered under term insurance, health insurance, car insurance or home insurance, will actually file a claim. In fact, only a very small fraction of those insured will actually have a loss. This is how the insurance companies spread the risk out.

For instance, Mumbai has more than 32 lakh vehicles[¹]. If 5 lakh vehicles are insured with the same insurance company, the actual proportion of vehicles meeting with an accident or getting stolen is only a fraction. If you look at it, the fraction is even smaller considering that accidents don’t happen every year. Only a small fraction files an auto claim. The rest don’t, but pay the premium like everybody else. By pooling the risk, there is plenty of money available for the insurance company to pay the small number of claims*. Learn about how to secure your car against a range of damages.

Whether you are an individual or a business, it is important to buy insurance before the event that you are insuring against actually happens. Just as the timing of insurance purchase is important, it is equally vital that you should buy insurance from a trusted source who can hand-hold you if required and assist you post-sale, if required. Standard Chartered India with its wealth of experience and expertise is prepared to be with you on your insurance journey by bringing you carefully evaluated products from insurance partners. Check out the offerings here.


This document is for information and educational purposes only. It is meant only for use as a reference tool. It has not been prepared for any person or class of persons. All insurance products are underwritten by the respective insurance companies and not by Standard Chartered Bank. This document does not constitute an offer to buy or sell an insurance product, nor is it intended to provide insurance or financial advice. You may wish to seek advice from a qualifies advisor before purchasing the policy, and in the event that you choose not to seek advice, you should consider whether the policy is suitable for you.

Standard Chartered Bank, India having its corporate office at Crescenzo Building C-38/C-39 G Block, Bandra Kurla Complex, Bandra (East), Mumbai – 400051 is a licensed Corporate Agent of ICICI Prudential Life Insurance Company Limited for life insurance products, Royal Sundaram General Insurance Co. Limited and Bharti AXA General Insurance Company Limited for general insurance products and Max Bupa Health Insurance Company Limited (IRDAI Registration no. 145) for standalone health insurance products vide composite license number CA0028.

All figures shown here, if any are for illustrative purposes only. Actual premium calculations will vary from person to person.

Participation in any insurance scheme is purely voluntary, and is not linked to the availment of any other banking products or services from Standard Chartered Bank. The benefits/ features of the products are indicative only. For more details on risk factors and terms and conditions, please read sales brochure carefully before concluding sale. Insurance is the subject matter of solicitation.