Do you know about insurance?
We all have heard a lot about insurance. In a general sense, insurance is something that covers you or your insured items against a major financial loss. But there’s more to it than just a cover for something you think has the potential to cause damage. Let’s look at this in detail.
What is insurance?
In technical terms, it is a form of risk management in which the insured company transfers the cost of a potential loss to another company in exchange for a small monetary compensation. This compensation is called premium. In simple terms, it is like paying a lump sum to a company to protect yourself against future losses. Thus, when some misfortune occurs, the insurer helps you overcome the situation.
Why do we need insurance?
This question is on everyone’s mind. Do I really need protection? Life is full of surprises; Some good, some bad. You have to be prepared for the worst that can happen to you. It helps you gain a sense of security and peace. There are many reasons why you may need help like serious illness, natural calamity, unexpected death of loved ones. Adequate coverage in such situations can significantly help your financial situation. Therefore, one should choose the right type of security according to their needs.
Types of insurance
1. Life Insurance
Life insurance is one of the traditional forms of insurance, designed to protect you and your loved ones against a sudden calamity or disaster. It was originally designed for the protection of families. But since then, it has changed from a conservation measure to an option for wealth preservation and tax planning. A person’s life insurance requirement is calculated based on various factors like number of dependents, current savings, financial goals etc.
2. General Insurance
Any type of coverage other than life comes under this category. There are different types of insurance that cover every aspect of your life as per your needs
A. Health insurance
It covers medical and surgical expenses that may be incurred during your lifetime. Generally, health insurance provides cashless facilities at listed hospitals.
B. Motor insurance
It covers damages and liabilities associated with a vehicle (two-wheeler or four-wheeler) against various circumstances. It provides protection against damage to the vehicle and also provides protection against any third party liability imposed by law against the owner of the vehicle.
C. Travel insurance
It insulates you from emergencies or losses incurred during your journey. It covers you against unforeseen medical emergencies, theft or loss of luggage.
E. Home insurance
It covers the home and/or contents depending on the scope of the policy. It protects the home from natural and man-made calamities.
F. Marine Insurance
It covers goods, cargo etc. from loss or damage during transit.
G. Commercial insurance
It provides solutions for all sectors of industry like construction, automotive, food, power, technology etc. Risk protection requirements may vary from person to person but the basic function of an insurance policy is more or less the same.
Also Read : Things to consider while taking auto insurance
How does insurance work?
The most basic principle behind the concept of insurance is ‘risk pooling’. A large number of people are willing to insure themselves against a particular loss or damage for which they are willing to pay the desired premium. This group can be called insurance-pool. Now, the company knows that the number of interested parties is very large and the probability of all of them needing insurance coverage at the same time is almost impossible. Thus, it allows companies to collect payments at regular intervals and settle claims if such a condition arises. The most common example of this is insurance. We all have auto insurance, but how many of us claim it? So, you pay and insure against the probability of damage and you get paid if a given event occurs.
So when you buy an insurance policy, you pay a regular amount to the company as premium for the policy. If you decide to make a claim, the insurer will pay the damages covered by the policy. Companies use risk data to calculate the probability of the event — you’re looking for insurance — happening. Higher the probability, higher is the premium of the policy. This process is called underwriting, i.e. the process of evaluating the risk to be insured. The company seeks only the actual value of the insured as per the insurance contract entered into between the parties. Eg, you have insured your ancestral house for 50 lakhs, the company will only consider the actual value of the house and will not entertain any sentimental value that the house holds for you as it is almost impossible to price emotions.
Different policies have different terms and conditions, but three main general principles are the same for all types
- Security given to an asset or thing is for its intrinsic value and does not consider any sentimental value.
- Claim potential should be spread across policyholders in order for insurers to calculate the likelihood of risk to set the premium for the policy.
- Losses should not be intentional.
We’ve covered the first two points above. The third part is a bit more important to understand
An insurance policy is a special type of contract between the insured and the insured. It is a ‘very good faith’ contract. This means that there is an unspoken but very important understanding between the insurer and the insured, which is usually absent in conventional contracts. This understanding includes an obligation of full disclosure and not to make false or intentional claims. This duty of ‘good faith’ is one of the reasons the company may refuse to settle your claim if you fail to provide all the required information. And it’s a two-way street. The company owes ‘good faith’ duties to the customer and failure to fulfill it can cause a lot of problems for the insurer.
Every sound financial plan is backed by risk protection. The right cover for you is determined by your needs and current financial situation. You should review and reconsider the costs included in your policy and evaluate their impact on your current financial health. There are a lot of ifs and buts involved, but the basic basics of the job remain the same across all types of insurance. You should be clear about what type of risk protection you are buying, why you are buying it and what is covered in the contract. It is also important that both parties act in ‘very good faith’ so that the entire process of insurance is clear and hassle-free. And as with every financial product, you should be knowledgeable about the product you are buying and get the best advice from your financial advisor.
Also Read : Car Insurance in 2023
Frequently Asked Questions:
1. What is a risk pool?
A: Risk pooling refers to small groups of individuals pooling money for better insurance rates and coverage plans. Instead of approaching the insurance company as an individual, you approach it as a company, improving purchasing power. This can be done through companies or cooperatives on behalf of employees. Insurance companies also undertake risk pooling. They come together to protect each other through insurance coverage
2. Why should I buy insurance?
A: With the help of a policy, you can effectively transfer the potential loss to the insurance company. You can do so to change the payment called ‘Insurance Premium’. The benefit of insurance is that it protects your savings at an unprecedented cost.
3. Who will benefit if I buy insurance?
A: When you buy an insurance policy, both the insurer and the insured benefit. As the insured, you are safe in the knowledge that you are protected against potential loss. Likewise, the insurance company uses the money you pay as premiums to build better business models and assets.
4. What should I look for when buying insurance?
A: When you buy an insurance policy, you should check the premium and coverage. These should be according to your needs.
5. What is ‘underwriting’?
A: Underwriting is a service provided by insurance companies where the companies act as guarantors for the insured persons. However, insurance companies may ask people seeking insurance services to provide stocks or bonds as a security deposit.
6. Are the terms and conditions different based on the policies I purchase?
A: Yes, the terms and conditions of the policy vary depending on the type of insurance policy you purchase. The two main types of insurance are life insurance and home insurance. Under general insurance comes health, travel, home, corporate and auto insurance. Depending on the policy you purchase, your terms, conditions and premiums payable will vary.
7. Can I buy more than one insurance policy?
A: Yes, an individual can purchase different types of policies. There are also no limits on the number of life insurance policies an individual can purchase. However, for one vehicle, you need to buy only one auto insurance policy.
8. Is there any compulsory insurance?
A: Yes, it is mandatory for owners of vehicles to purchase an auto insurance policy. Otherwise, you will run into legal problems.
9. What is the importance of health insurance?
A: A health insurance policy or medical insurance can protect you from unexpected medical or hospitalization expenses. If you buy medical insurance, your savings will be protected in case of sudden hospitalization. All expenses like doctor’s fees, hospitalization charges, ambulance charges, OT charges and medicine are covered under the insurance policy. Thus, your savings will be protected.
10. What is insurance premium?
A: Insurance premium is the amount paid from time to time to the insurance company to purchase the insured individual policy. When you buy an insurance policy, the risk is transferred to the company. Therefore, the company charges a fee, which is called the insurance premium.
11. How is the premium calculated?
A: Insurance companies use mathematical calculations and statistics to estimate the value of the insurance premiums they charge their customers. Different parameters are used to calculate premiums for different insurance policies. For example, while calculating the premium for a health insurance policy, age, health, medical history and other similar factors are considered. Similarly, for other insurance policies, life history and credit scores are considered.
12. Can I get a refund of the premium if I don’t claim the insurance?
A: If you cancel your life insurance policy after paying the premiums regularly, you can get back at least the premium. However, it depends on the terms and conditions of the insurance policy. But you cannot claim the premium when the policy expires.