Introduction
An insurance policy/plan is an contact between an individual (Policyholder) and an insurance company (Provider). Under the contract, you pay regular amounts of money (as premiums) to the insurer, and they pay you if the sum assured on unfortunate event arises, for example, untimely demise of the life insured, an accident, or damage to a house. Let’s know more about what is insurance and what are the various benefits, features & types of insurance
In order to make the most educated decision about whether insurance is worth the cost, it’s important to weigh the pros and cons of each situation in which you might consider insurance coverage. Is insurance worth the cost? Weighing the pros and cons will help you answer that question and decide how much coverage you need and how much you can afford to pay for it.
The choice of a specific type of insurance policy is made based on individual needs and life goals.
There are various components of an insurance policy, a firm understanding of which helps a lot in choosing the plan that is most suitable for your needs.
Insurance Components
Here are some of these components to help you better understand ‘what is insurance’ and how it works:
Insurance Premium Policy
The premium of an insurance policy is the amount that you need to pay to purchase a specific amount of insurance cover. It is typically expressed as a regular cost, be it monthly, quarterly, half-yearly, or annually, that you incur during the premium payment term.
There are various factors based on which an insurance company calculates the premium of an insurance policy. The idea behind is to check the eligibility of an insured individual for the specific type of insurance policy that he/she wants to buy.
For example, if you are healthy and do not have a medical history of getting treatment for severe bodily diseases, you will likely to pay less for health insurance or life insurance policy than someone suffering from multiple ailments.
You should also know that different insurance companies may ask for different premiums for similar types of policies. So, selecting the right one at a price you can afford does require some effort.
Policy Limit
It is defined as the maximum amount that an insurance company is liable to pay for the losses covered under the insurance policy. It is determined based on the period (policy term), loss or injury, and similar other factors.
Typically, higher the policy limit, higher will be the premium payable. For a life insurance policy, the maximum amount that an insurer pays to the nominee is known as the sum assured.
Deductible
Deductible related to an insurance policy is the amount or percentage that the policyholder agrees to pay out of pocket before the insurer sets in to settle a claim. You can also think of it as a deterrent to small, insignificant claims that many people file under their insurance policies.
Deductibles are applicable per policy or per claim as defined by the terms of a specific type of policy. Generally, insurance policies bought with high deductibles are less expensive as the higher out-of-pocket expense results in fewer claims.
How Does Insurance Work?
As defined above, an insurance policy is a legal contract that binds both policyholder and the insurance company towards each other. It has all the details of the conditions or circumstances under which either the insured individual or policy nominee receives insurance benefits from the insurer.
Insurance is a method by which you can protect yourself and your loved ones from facing a financial crisis. You buy an insurance policy for the same, while the insurance company takes the risk involved and offer insurance cover at a specific premium.
In case of any eventuality, the insured or nominee can file a claim with the insurer. Based on the evaluation criteria for claims, the insurer reviews the claim application and settles the claim.
Types of Insurance
The four most common types of Insurances that people buy are :
- Life Insurance
- Home Insurance
- Health Insurance
- Motor Insurance
Advantages of insurance
1. Economic Protection: Primarily, insurance offers protection from economic liability. Insurance is a very wise and recommendable step to be taken by any person involved in economic activity. It makes someone conscious of the fact that risks are possible to occur, and he then takes the necessary step of insurance to minimize the effect of the risk.
Where the insured event eventually occurs, the insured does not loose out entirely for there is an insurer who has undertaken to incur the loss either financially or by reinstating the insured in the position he was prior to the occurrence of the specified event.
2. Periodic payment of premium: Premium is an amount to be paid as consideration for an insurance policy. It is upon the payment of premium that the insurer undertakes the bearing of risk of the insured. Interestingly, premiums are not paid in whole; they are rather paid by parts periodically, according to the terms of the policy.
3. Sharing of risks: By insurance, the risks of liability for the occurrence of the specified event are shared between the insured and the insurers. The insured has the obligation not to intentionally or recklessly cause the occurrence of the specified event. Thus, he has a duty to protect and preserve the subject matter of insurance. The insurer on the other hand bears the risk to indemnify the insured upon the occurrence of the specified event.
The compensation need not be in full; a substantial compensation or reinstatement is sufficient, depending on the terms of the contract. The indemnification may also be based on the policy valued at the time of the contract and not at the time of occurrence of the specified event.
There is also option for double insurance where the insured enters into insurance contract in respect of the same subject matter with more than one insurance company. In such a case, risks are shared accordingly, and upon occurrence of the specified event, the co-insurers have a right of contribution for indemnification of the insured.
4. Benefit to dependants: When one’s life is insured, the dependents can claim the insurance benefits upon the death of the person. By this setting, the dependants’ lives are not put to a halt by the death of their benefactor.
5. Offering of loan: Insurance companies are financial institutions. Just like banks, they can offer loans, undertake performance bonds, have investments and so on.
6. Employment opportunity: Insurance offers employment opportunities for people to work in the insurance companies.
7. Promotion of international trade: The fact that goods being transported via air and waters can be insured against loss caused by water and air hazards, encourages people to engage in international commercial transactions. Good being exported can be insured as well as goods being imported.
8. Economic development: The fact that there is a thing as insurance contributes to the state’s economic development. Insurance companies do pay tax. They work to sustain individual businesses and that of corporations in an event of damage or loss.
They are also corporations on their own capable of independent existences; they can own properties and make investments. All these contribute to a better economy of the state.
9. Protection from personal liability: After insurance contract has been initiated, the insured is shielded from being personally liable should the specified event occur. This is however only to the extent of civil liability.
10. Tax-free benefit: The benefits accruing to the insured cannot be subjected to tax.
Disadvantages of insurance
1. It is not all risks that can be insured against. For instance, where the causative factor is such that is very likely to occur. A building situate at an area that is prone to flooding may be refused insurance.
2. Insurance contract treats the breach of warranty as a breach of condition. Conditions in a contract are terms of major importance while warranty includes terms that are of minor importance. The effect of breach of condition is that it entitles the innocent party to repudiate the contract entirely.
3. There are a lot of formalities to be complied with in an insurance contract. It involves a lot of paper works, and may take longer time to initiate due to the fact that the parties have to be meticulous since insurance involves risk bearing. There are still many formalities at the time of indemnification after the insured event has occurred.
4. There seem to be much duty against the insured, of which their omission entitles the insurer to repudiate the contract. Duties such as the duty to disclose all material facts, duty to preserve the subject matter to allow its natural cause take place, duty to notify the insurer timely upon the occurrence of the specified event, and so on. These duties may sound too simple but they constitute enough grounds to vitiate and insurance contract should they be neglected.
5. There are chances that the insured event may never occur and a lot of money would have been paid as premium.
6. Insurance contract is a contract of indemnity. It only seeks to indemnify one for losses suffered. It is a principle of indemnity that the benefactor shall not be allowed to make profit, however the profit comes.
7. Terms and Conditions are drafted by the insurer only for the insured to fill in the necessary forms and sign. The insured is in fact the weaker bargaining party.
8. The higher the chances of the risk to occur the costlier the premium would be. For instance, insuring the life of an old or sick person would cost much more.
9. The total premium paid may be higher than the compensation should the specified event occurs.
10. The insurer is always at the side of finding breaches from the insured in order to escape liability should the specified event occur.
Conclusion
Insurance is a special kind of contract associated with risk bearing. Being a Contract, parties are at liberty to vary the terms. The ordinary nature of insurance operates to balance the positions and interests of the insurer and the insured, hence its technicalities in demands. It’s essential that you do your research on which type of plan is best for you before making any decisions. Insurance isn’t necessarily cheap, but it will be more expensive if you don’t have it when something happens.
