what is the meaning of insurance

What Is Insurance | TYPES OF INSURANCE | ADVANTAGES OF INSURANCE

what is the meaning of insurance

INTRODUCTION TO INSURANCE

Life is full of risks of things that could happen – the house burning down, the car being stolen, and illness preventing us from earning a living. The good news is that whatever the risk, chances are there is an insurance policy available to reduce the financial loss we would take should the worst occur.

Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain and unforeseen loss.

An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms and must involve something in which the insured has an insurable interest established by ownership, possession, or preexisting relationship.

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.

TYPES OF INSURANCE

There are various types of insurance policies. However, some of them are discussed below.

1. PROPERTY INSURANCE: Our home, household contents or other belongings are expensive to buy. Many people can’t afford to repair or replace these things if they are damaged or destroyed. By paying a fee called a ‘premium’ to an insurance company we get a promise in return that the company will pay the costs related to incidents covered by the policy. That can include damage to our car, house, or the costs of repairing someone else’s car or other property that we have damaged accidentally. It’s important to remember that we have a duty to tell the truth when applying for insurance. If we leave important information out when applying for insurance our future claims may not be paid.

2. HOUSE AND CONTENTS INSURANCE: Insuring our home protects it against the risk of fire or other damage. Most home insurance provides cover only up to the ‘sum insured’ – a capped amount that is the limit of what we can claim. We need to decide what our sum insured is – how much it would take to rebuild our home in the event of a disaster. House insurance is usually required by a lender when we have a mortgage. Lenders Mortgage Insurance covers the bank if we can’t make the payments on our loan. Contents insurance covers damage and loss of our belongings. It also provides some ‘third party’ cover if we damage someone else’s belongings in the house we are living in. So it’s a good idea when flatting or renting.

3. CAR INSURANCE: A car may be one of the most expensive items we own. If it is stolen or damaged in an accident it can be very expensive to repair or replace. Motor vehicle insurance will pay to repair or replace our car if these events occur. Comprehensive’ motor vehicle insurance is the most common and it covers us for loss, theft or damage to our vehicle. It also covers us for accidental damage to the other car or property we damage. It can be tempting to save money by not insuring a cheap car. This can be a mistake – if we cause an accident, we could be responsible for paying for the other car’s damage. Cheaper options are ‘third party’ and ‘third party, fire and theft’ cover. Third party insurance covers for damage to another person’s vehicle or property, but not ours. Extending third party insurance to fire and theft covers the risk of our car being destroyed by fire or stolen, too. The cost of insurance will vary depending on our age, claims history, the level of excess we are prepared to take, and the make and type of vehicle.

4. HEALTH INSURANCE: Health is a precious thing. If we fall sick and can’t work we still need money to pay the bills. Insurance can help us make ends meet if we are unable to earn our normal income. There are many types of health-related policies, such as:

Medical insurance, which covers private hospital and other medical bills
Trauma (also called critical illness), which provides a lump sum if we suffer from certain illnesses or injuries such as cancer, heart disease or paralysis
Income protection insurance, which pays a percentage of our income on an ongoing basis if we suffer from named illnesses
Disability insurance, which pays out a lump sum for permanent disablement through sickness or accident
Mortgage protection insurance, which covers our mortgage if we can’t work
5 LIFE ASSURANCE: Life assurance provides a lump sum of money if we die. In some cases a portion or the entire ‘sum insured’ is paid out before we die if we are diagnosed with a terminal illness.

ADVANTAGES OF INSURANCE

The importance of Insurance cannot be overemphasized. It is without exaggeration to opine that every living adult should adopt as many as possible various insurance policies due to the various advantages itemized below.

Economic protection

Insurance provides economic and financial protection to the insured against the unexpected losses in consideration of nominal amount called premium. It provides financial protection to the nominee in case of the premature death of insured. It also covers the loss of properties due to theft, fire, accident and other natural calamities.

Shares risks

People are exposed to various kinds of risks and uncertainties which may cause large losses. It is impossible to eliminate risks and uncertainties altogether but it can be reduced or shared. Insurance is a co-operative device, which helps to share the risks among the insured. Thus, the insurance company reduces the risk of the insured in exchange for a small premium.

Maintains the standard of living

Insurance provides financial protection against an unexpected risk of losses due to which people can maintain their living standard. The insurance company provides a safeguard in terms of money to avoid the unfortunate financial crisis.

Encourages saving

An insured person pays the amount of premium in time as stated in the agreement which encourages for developing a saving habit of persons. Hence, insurance is a means of encouraging regular saving as it helps to reduce unnecessary expenses.

Eliminates dependency

decreased over-dependence and reliance on friends and families is one of the dividends of insurance policies. At the occurrence of drastic and tragic events such as loss of a car, dwindling health, fire outbreak etc, the insurance company comes to the aid of the insurer. This has reduced dependency to its barest minimum

Grants loan

An insured can get the facility of a loan from an insurance company or can take loan from other financial institutions through the security of insurance policy. Thus, this provision of loan helps a person can also meet the need of fund. Bank and financial institutions prefer the insured assets as collateral for providing a loan.

Creates employment opportunities

The business of insurance has received a huge interest by entrepreneurs more than ever before. This has created a lot of employment opportunities as recruitment of employees and more employees are on the increase.

Promotes foreign trade

The growth of the international trade of the country has been greatly helped by shifting of risk to the insurance company. A ship sailing in the sea faces some miss-fortune. A fire breaks out and burns to ashes all the merchandise of a businessman. But insurance is one of the devices by which these risks may be reduced or eliminated. So industrialists and exporter may devote their full attention toward the promotion of business which may increase the export activities

Helps to operate business smoothly

A business gets financial compensation in case of loss or damage to the properties of the business through insurance. An insurance policy taken for the employees increases their motivation at work. Therefore, insurance plays a vital role to let the business run smoothly even in the situation of unfavorable events.

Help to reduce inflation

The inflation means an increase in the price of goods or service. Inflation gives painfully experienced to the citizen so it should be controlled. To control inflation, the volume of money needs to be reduced. An insurance company takes the money from the people in the form of premium, which reduces the volume of money in the market. Hence, it helps to control the inflation in the country.

Help to develop the economy

Insurance companies collect premium through life or non-life policies which are invested in various development areas like trade and industry. Such investment helps to promote trade and industry in the country. Ultimately, it helps for the economic development of the country.

Disadvantages of Insurance

The following are the main disadvantages of insurance: –

It does not cater for types of losses. This is caused by bias and apathy.
It takes more time to provide financial compensation because of lengthy legal formalities.
Although insurance encourages savings, it does not provide the facilities that are provided by the bank.
It intentionally tries to compensate as less as possible to the sufferer with the aim of maximizing profit rather than maximizing the well-being of the insured.
It may lead to the crimes in the society as the beneficiaries of the policy may be tempted to commit crimes to receive the insured amount.
Sometimes, the total amount of premium might be higher than the policy amount receivable on maturity.

SUMMARY

From all indications, the merits of insurance schemes are far too admirable than the demerits. Uncertainties are the realities of life and no one knows when the next tragedy would strike. It is urgent and wise you grab an insurance scheme as soon as possible and get insured!

How Insurance Works?