Insurance is a legal arrangement between the insurer (insurance company) and the insured (individual), in which the insured receives financial protection from the insurer for losses that he may suffer under certain circumstances.
As part of the insurance contract, the insured must pay the insurer a regular amount of premium. The insurer pays the insured a predetermined sum insured if an unfortunate event occurs, such as the death of the insured life or damage to the insured or his property.
Insurance - meaning and definition
The literal meaning of insurance would be to secure against unforeseen and unfortunate loss. This means that if you encounter a less-than-ordinary event in your normal life and accidentally suffer a financial loss as a result, you may be compensated.
For example, you met with an accident in your car on the way to the office and the car suffered damage. In this case, your insurance company may reimburse the cost of the repair. However, normal wear and tear, such as when the headlamp stopped working, will not be covered by the insurer.
Legal insurance has been defined as a contract where the insurer undertakes to compensate the insured for damages arising from an unforeseen event. The contract also includes a consideration called a premium. The maximum amount of benefit available is called the Sum Assured or Sum Insured.
How does the insurance contract work?
To understand how insurance works, you should know the terms below:
1. Premiums:It is the money you pay to the insurance company for the use of insurance benefits.
2. Sum insured: The sum assured applies to non-life insurance such as home insurance and health insurance. It refers to the maximum cost cap you are covered against any unfortunate event in a year.
3. Sum assured:The sum insured is the amount that the life insurance company will pay to the nominee if an insured event occurs (death of the insured).
As mentioned above, insurance is a legal contract between an insurer and an insured. The policy states all the terms and conditions of the policy, under which the insurance company is obliged to pay you or the nominee the sum insured.
When you buy a policy from an insurance company, you will have to make regular payments (premiums) on the policy for a set period of time.
The insurance company collects premiums from all clients. They pool money for losses that may arise from an insurance event. You may or may not receive any benefits if you do not make a claim during the policy term. It depends on the type of policy and terms.
Components of Insurance Policy :
The fuse consists of several components. Some of the important parts of an insurance policy are:
a) Premium : This is a financial consideration that makes the insurance contract a legally binding contract.
b) Policy Limit: The insurance limit applies to health and general insurance, where compensation depends on the amount of damage. This policy may limit the maximum compensation for certain types of losses.
c) Deductible : The deductible applies to general insurance and health insurance. The deductible is the maximum amount of loss that you will bear out of your own pocket. The insurer will only start paying out when your losses (or expenses) exceed the deductible limit.
Types of insurance contracts
You can categorize the insurance based on the type of coverage it provides as below:
1. Life insurances: It's your life insurance. You buy life insurance to ensure that your loved ones are financially secure even when you are not around. If you are the sole breadwinner, you would like your family members to maintain the same standard of living in the event of your untimely death. The nominee will receive an amount assured in the event of your death.
2. Health insurance : Although health insurance is usually counted as a general insurance policy, there are several differences. Health insurance covers your medical expenses for expensive treatments.
You can use two types of health insurance:
- Mediclaim Insurance, which compensates you for medical expenses
- Critical health insurance that offers lump sum payments for dangerous and life-threatening medical conditions
Thanks to these two variants, health insurance ranks perfectly between general and life insurance. Both health insurances are also important to ensure complete financial security for you and your family.
Find out if you should opt for long-term or short-term health insurance.
3. Non-life insurance : These compensate you for losses incurred as a result of a specific financial event that is not related to life. Non-life insurance can be car insurance, home insurance, etc.
Key features of insurance
The key features of insurance that make insurance plans out of all other financial instruments and investments are:
i. Insurance is a risk transfer tool.
ii. Insurance is a community solution because several people who are exposed to the same risk pool their funds to bear the loss.
iii. The contract is based on the principle of "maximum good faith" unlike other commercial contracts.
iv. Insurance coverage does not affect the probability of loss or minimize the amount of damage.
v. As a party to an insurance policy, you should always seek to avoid, mitigate and minimize losses.
vi. You can only insure yourself against risks whose occurrence and extent are unpredictable.
vii. Speculative, financial (betting) and business risks cannot be insured.
Benefits of insurance
You must have insurance for the following reasons:
1. Financial security for the family: They provide protection against life's uncertainties and protect you from losses arising from various unexpected events in life.
2. Security of financial status: Certain events, such as medical emergencies, can have a significant impact on your cash flow management. Insurance ensures that you don't have to pay out of pocket for such situations.
3. Wealth Creation Goals:
Insurance policies like ULIPs provide you with investment opportunities and help you meet your basic financial goals.
4. Wealth Protection: Life insurance policies, like endowment and money back plans, are some of the safest long-term investments possible. These plans help protect your wealth from inflation and taxes for a long time.
5. Distribution of wealth: Few investment plans offer the kind of security that life insurance retirement plans offer. After retiring at age 60, you can live up to 100 years. Only life insurance pension plans can guarantee regular income for this period.
******