Insurance

What is Insurance?

A promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance, aimed at safeguarding the financial well-being of individuals, companies, or other entities against unexpected losses, comes in various mandatory and optional forms. Entering into an insurance policy establishes a contractual agreement between the insured and the insurer. The insured, through regular payments termed premiums, ensures coverage, while the insurer commits to providing compensation to the policyholder upon the occurrence of predefined events.

Types of Insurance

Insurance can be purchased for a wide range of needs to provide financial protection. Among the most common types are:

  • Life – Provides financial support to beneficiaries in the event of the insured individual’s death.

  • Health -Also known as Mediclaim, it covers medical expenses incurred due to illness or injury.

  • Auto  –Protects against financial loss resulting from accidents, theft, or damage involving vehicles.

  • Home  –Provides coverage for damage or loss to one’s property and belongings, including protection against natural disasters and theft.

 

 

What is Premium?

Premium is a specified amount stipulated by the insurance company, which the insured individual should periodically pay to maintain the actual coverage.

As a process, companies examine the type of coverage, the likelihood of a claim being made, the area where the policyholder lives, his employment, his habits (smoking for instance), his medical condition (diabetes, heart ailments) among other factors.

Companies employ actuaries for the purpose of determining, for example, the likelihood of a claim being for a heart attack or cancer or another critical illness by individuals across various age groups and lifestyles. The greater the risk associated with an event/claim, the more expensive the  premium will be.

Benefits of Insurance

Insurance benefits individuals, organizations and society in more ways than the average person realizes.  Some of the benefits of insurance are obvious while others are not.

  1. The obvious and most important benefit is the payment of losses.  An  policy is a contract used to indemnify individuals and organizations for covered losses.

  2. The second benefit is managing cash flow uncertainty.  Insurance provides payment for covered losses when they occur.  Therefore, the uncertainty of paying for losses out-of-pocket is reduced significantly.

  3. A third and uncommon benefit is complying with legal requirements.  Meets statutory and contractual requirements as well as provides evidence of financial resources.

  4. Another very important benefit  is promoting risk control activity. Policies provide incentives to implement a loss control program because of policy requirements and premium savings incentives.

  5. The fifth benefit is the efficient use of an insured’s resources.  Makes it unnecessary to set aside a large amount of money to pay for the financial consequences of the risk exposures that can be insured.  This allows that money to be used more efficiently.

  1. Another uncommon, important benefit of insurance is support for the insured’s credit.  Insurance facilitates loans to individuals and organizations by guaranteeing that the lender will be paid if the collateral for the loan is destroyed or damaged by an insured event.  This reduces the lender’s uncertainty of default by the party borrowing funds.

  2. The seventh benefit of insurance is it provides a source of investment funds.  Insurance companies collect premiums up front, invest those premiums in a variety of investment vehicles, and pay claims if they occur.

  3. The last benefit of insurance is reducing social burden.  Insurance helps reduce the burden of uncompensated accident victims and the uncertainty of society.