Insurance is often treated as an expense that people hope they never have to use. But for an investor, that is an incomplete way of looking at it. The better question is not whether insurance will generate a return. It is whether a financial risk could be large enough to undo years of savings and investments.

A major medical expense, the premature death of an earning member, or significant damage to an important asset can materially change a family’s financial position. Insurance exists to transfer specified financial risks to an insurer.

That makes insurance an important part of financial planning, particularly when the potential loss is too large to comfortably absorb.

Insurance regulation and supervision in India are overseen by the Insurance Regulatory and Development Authority of India (IRDAI).

What is insurance and how does it work?

Insurance is a contractual arrangement between a policyholder and an insurance company. The policyholder pays a premium and, in return, the insurer provides financial protection against specified risks, subject to the policy’s terms and conditions.

The fundamental principle is risk transfer.

You cannot eliminate every financial risk. Even with careful driving, a healthy lifestyle and disciplined savings, accidents, illness, property damage and premature death remain possible.

Insurance does not eliminate these risks. Instead, it helps transfer their financial consequences to the insurer.

The premium is therefore the cost of transferring a specified financial risk.

If the insured event occurs and the claim satisfies the policy conditions, the insurer provides the applicable benefit or compensation. The nature of that benefit depends on the type of insurance.

For consumer guidance on insurance products, claims and policyholder rights, investors can also refer to IRDAI’s policyholder education portal.

What is tolerable risk vs non-tolerable risk?

Not every risk needs to be insured. A useful financial-planning framework is to distinguish between tolerable risk and non-tolerable risk. Losing a wallet containing a few thousand rupees may be inconvenient but financially manageable. That is a tolerable risk.

A major medical expense, the loss of a home or the premature death of an earning member can have a very different impact. These are risks that may be difficult for a household to absorb without seriously disrupting its financial goals.

An emergency fund can help a household absorb smaller, unexpected expenses, while insurance is designed to protect against specified risks that could be significantly larger. [Learn how much emergency fund you may need and how to build one. Learn how much emergency fund you may need and how to build one.

Risk	Example	Insurance relevance
Tolerable risk	Loss of a wallet	May be manageable from savings
Non-tolerable risk	Major medical expense	Health insurance may provide protection
Non-tolerable risk	Premature death of an earning member	Life insurance may protect dependants
Non-tolerable risk	Major damage to an important asset	General insurance may provide protection

This leads to a better question than simply asking, “Which insurance should I buy?”

Ask instead: Which risks can I afford to retain, and which risks could seriously derail my financial plan?

What are the main types of insurance?

Life insurance

Life insurance is primarily designed to protect dependents from the financial consequences of the policyholder’s death.

If an earning member dies prematurely, the family may still have to meet expenses such as children’s education, housing costs, debt obligations and long-term financial goals.

Term insurance is generally designed to provide relatively high coverage for a lower premium compared with other life insurance products. Under a standard term insurance policy, the death benefit is paid if the policyholder dies during the policy tenure.

A standard term plan generally does not provide a maturity payout if the policyholder survives the term. However, Term Return of Premium (TROP) plans are an important exception. Depending on the product, eligible base premiums may be returned on survival, subject to the policy’s terms and conditions.

The important distinction is therefore between buying insurance primarily for protection and selecting a product that also has a maturity benefit.

Health insurance

Health insurance is designed to cover eligible medical expenses according to the policy’s terms. Coverage may include hospitalization, daycare treatment and specified pre- and post-hospitalization expenses.

Many health insurance policies provide cashless treatment at network hospitals, subject to policy terms and pre-authorization. IRDAI describes cashless facility as direct payment by the insurer or TPA to the network provider to the extent that cashless approval is granted.

Health insurance has another important role for investors. A large medical expense can force a household to withdraw savings or sell investments at an inconvenient time.

Adequate health insurance can therefore help protect not only cash flow but also a long-term investment plan.

General and liability insurance

General insurance can protect assets and businesses against specified risks.

Examples include car, home and business insurance. If a covered loss occurs during the policy period, the insurer can provide compensation subject to the applicable policy conditions and coverage limits.

The underlying principle remains the same: transfer a financial risk that could otherwise be difficult to absorb.

What are the key components of an insurance policy?

Three components deserve particular attention when evaluating a policy.

Component	Meaning
Premium	Amount paid to maintain the insurance cover
Policy limit	Maximum amount the insurer can pay for covered losses
Deductible	Amount of an eligible loss that the policyholder bears before the insurer’s compensation applies

The distinction between deductible and policy limit is particularly important.

The policy limit determines the maximum protection available. The deductible determines how much of a covered loss you may have to bear yourself before the insurer pays.

A lower premium does not automatically mean a better policy. The coverage needs to be adequate for the risk being transferred.

How should you choose your insurance coverage?

The right insurance amount depends on your financial circumstances and the risks you cannot comfortably absorb.

For life insurance, consider your dependents, income, liabilities and future financial responsibilities.

For health insurance, consider whether a major medical expense could materially reduce your savings or investments.

For asset insurance, consider whether you could comfortably absorb the loss yourself.

A simple framework is:

Question	What it tells you
What could go seriously wrong?	Identifies the major financial risks
Can my savings absorb that loss?	Determines whether the risk is tolerable
Who depends on my income?	Helps establish life insurance needs
Could a major medical bill disrupt my investments?	Helps assess health insurance needs
What is the policy limit?	Determines maximum protection
What is the deductible?	Determines potential out-of-pocket exposure
Can I sustain the premium?	Tests affordability

The objective is not to insure every possible inconvenience. It is to protect against losses that could materially damage your financial plan.

What are the tax benefits of insurance in 2026?

Tax treatment is an area where older insurance articles can quickly become outdated.

For AY 2026-27, taxpayers need to consider which tax regime they are using. Section 80C and Section 80D deductions are relevant under the Old Tax Regime and are not available under the New Tax Regime. Therefore, a tax deduction should not be assumed simply because a person has paid an eligible insurance premium.

Section 80C insurance deduction

Under the Old Tax Regime, eligible life insurance premiums can form part of the combined ₹1.5 lakh Section 80C deduction limit, subject to the applicable conditions.

Section 80D health insurance deduction

Under the Old Tax Regime, Section 80D provides deductions for eligible health insurance premiums.

The relevant limits include:

• Up to ₹25,000 for self, spouse and dependent children, subject to the applicable conditions.

• Up to ₹50,000 where the relevant person is a senior citizen.

• A separate limit of ₹25,000 for parents, increasing to ₹50,000 where the parent is a senior citizen.

Where both the taxpayer/family and parents qualify for the senior-citizen limits, the potential combined deduction can reach ₹1 lakh, subject to the applicable conditions.

The ₹5,000 preventive health check-up sub-limit is included within the overall Section 80D limit, rather than being an additional deduction.

Section 10(10D): what has changed?

The assumption that all life insurance maturity proceeds are automatically tax-free is no longer sufficient.

The 10% of sum assured condition remains relevant in determining exemption in applicable cases. In addition, premium-based limits apply to specified policies.

For specified non-linked life insurance policies issued on or after April 1, 2023, the exemption can be affected where the aggregate annual premium exceeds ₹5 lakh.

For specified ULIPs issued on or after February 1, 2021, the relevant premium threshold is ₹2.5 lakh.

These limits concern the tax treatment of maturity or surrender-related proceeds, not death payouts. Death benefits continue to receive separate treatment under Section 10(10D), subject to the applicable conditions.

Where specified maturity proceeds become taxable, the taxable amount is generally dealt with under Income from Other Sources, with the relevant aggregate premium component deducted in accordance with Section 56(2)(xiii).

Because Section 10(10D) treatment depends on the policy type, issue date, premium structure and other conditions, investors should verify the applicable tax treatment before purchasing a policy.

How does insurance fit into your investment plan?

Insurance and investments solve different problems.

Investments build wealth. Insurance protects the financial plan from specified risks.

Suppose a family has accumulated investments for retirement and children’s education. A large medical expense could force them to liquidate those investments. Similarly, the premature death of an earning member could leave the family without sufficient resources to meet future obligations.

Insurance creates a protective layer around the wealth-building process.

This is why the decision should not begin with, “Which policy offers the highest return?”

It should begin with:

What financial risk could seriously damage the plan, and how much of that risk should I transfer?

What should investors focus on when buying insurance?

Premiums and tax benefits often receive the most attention, but they are not necessarily the most important considerations.

Investors should focus on whether:

• The coverage matches the actual financial risk.

• The policy limit is adequate.

• The deductible and other out-of-pocket exposures are understood.

• The premium can be sustained over time.

• The policy’s exclusions, waiting periods and other conditions are understood.

• The product is being purchased for genuine protection rather than primarily for its tax or maturity features.

The cheapest policy is not necessarily the best policy. A product with a maturity benefit is not automatically more appropriate either.

The right policy is one that addresses a financial risk you cannot comfortably afford to retain.

The bottom line

Insurance is not primarily about predicting whether something will go wrong. It is about making sure that one unexpected event does not undo years of financial planning.

Life insurance can protect dependents. Health insurance can protect savings and investments from eligible medical expenses. General insurance can protect important assets against specified losses.

The most useful starting point is to identify your non-tolerable risks, understand their potential financial impact, and then decide which risks should be transferred through insurance.

A well-structured financial plan is not only about growing wealth. It is also about protecting the wealth-building journey.