Insurance Meaning Explained Types Principles Benefits

Insurance Meaning

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It can be viewed as a financial product developed by insurance companies and used by consumers to manage risk. The insurers generally develop products with a predefined duration. When it reaches the expiry date, the coverage also expires. However, policyholders can renew or purchase a new policy at the end of the term.

Key Takeaways

Insurance is a contractual agreement between the insurance company (insurer) and the insured (policyholder).The insurer agrees to compensate the insured for financial losses caused by specific events in the future. In exchange, the insured pays the premium periodically.Its different type includes life, health, auto, and travel insurance.Its principles include the principle of utmost good faith, the principle of insurable interest, the principle of indemnity, the principle of proximate cause, the principle of subrogation, the principle of contribution, and the principle of loss minimization.

Insurance Explained

Insurance gives financial protection since it protects policyholders from financial losses associated with unexpected events or accidents. If the loss happens, the compensation in line with the policy is delivered after conducting a fair investigation.

Insurance business results in massive funds collected from different sources such as individuals and companies. They use the money collected as a premium to engage in investment activities and, when needed, provide the rightful compensation to the policyholders.

The rules and procedures determining the requirement and amount of compensation that an insurer offers to the insured party during the financial losses are majorly covered and mentioned in the policy. Furthermore, the companies also provide a grace period to the policyholder. It is the additional time provided beyond the premium payment due date to keep the insurance in effect in case of default in premium payment.

Types of Insurance

Customers require protection plans for various purposes; hence, various policies exist.

Life Insurance: It pays out a fixed amount of money upon the insured person’s death or after a specific period.Health Insurance: It covers fully or partially a person’s medical expenses caused due to illness.Auto Insurance: It covers loss or damage to any vehicle. In other words, it protects from financial loss brought on by the damage of an insured motor vehicle. A famous example is car insurance.Travel Insurance: It protects from any accidental financial losses incurred while traveling, whether abroad or domestically. Travel-related costs, losses, and other listed expenditures are all covered by it.

Principles

In insurance, there are generally seven principles that must be fulfilled:

Principle of Utmost Good Faith: This is a fundamental principle. It states that both parties should operate in good faith toward one another, which requires that they communicate the terms and circumstances of the contract clearly and straightforwardly. In addition, the insured should disclose all relevant facts, and the insurer must provide factual data about the deal. Principle of Insurable Interest: This rule states that the insured person must have an insurable interest in the matter under consideration. To put it another way, the matter or asset that the insured is seeking protection for should benefit the insured financially and result in financial loss in the event of damage, destruction, or loss.Principle of Indemnity: The principle states that the insured must get compensation for losses, but only to the extent that the insurer does not profit from the actual loss. In other words, the compensation must be comparable to the loss’s worth.Principle of Proximate Cause: The insurance company will investigate the underlying causes of the accident or loss to the property, given there is more than one cause. The investigation identifies the real or nearest cause of the accident or loss. Then accordingly, compensation is given to the policyholder.Principle of Subrogation: It involves passing the insured’s right to claim to the insurer when a third party causes the loss. In such a case, the insurance company has a legal right to seek recovery from that party. Therefore, subrogation can only benefit the insurance company if it recovers the money it paid to its policyholder and the costs of obtaining it. Principle of Contribution: According to the contribution principle, if an insured has taken insurance from more than one insurer, both insurers will share the loss in proportion to their respective coverage. The insurer cannot obtain compensation twice.Principle of Loss Minimization: There is a minimal obligation placed on the insured to take all reasonable steps to minimize loss. Even after purchasing insurance, policyholders must take all necessary precautions to avoid loss.

Benefits

It promotes savings and investments.It reduces the income available for discretionary or luxury spending.The companies in the sector offer pension plans to help create retirement funds.It helps plan important events in life.It provides effective long-term investment plans.It provides safety and protection from unforeseen circumstances and subsequent loss. The policyholders feel more secure knowing they are covered by insurance. For future benefits, the insured pays a small portion of their income. Therefore, substantial financial aid is guaranteed in exchange. The cash flow reaches diverse projects like water supply, power, and highways, contributing to the nation’s economic growth. The industry generates job opportunities.The industry supports economic growth in various ways, including attracting foreign direct investment, paying taxes on profits, and participating in the capital market.