What is insurance and why is it needed?

What is insurance and why is it needed?

What is insurance and why is it needed?

Insurance is a legal contract between two parties – the insurer and the insured. Insurance is a legal contract between two parties i.e. insurance company (insurer) and individual (insured). In this, the insurance company promises to cover the loss of the insured in the event of an insured event.

It is also known as insurance coverage or insurance policy. A person's life and property are surrounded by risk of death, disability or destruction. These risks can lead to financial losses. Insurance is a smart way to transfer such risk to the insurance company.

Based on the insurance terms, the insurer pays a lump sum to the policyholder/nominee on the occurrence of an event. Choosing a particular type of insurance policy is based on individual needs and life goals.

An insurance policy has various components, a solid understanding of which goes a long way in choosing the plan that best suits your needs.

How does insurance work?

The insurer and the insured enter into a legal contract for insurance, called an insurance policy. The insurance policy details the terms and conditions under which the insurance company will pay the sum assured to the insured or nominees.

Insurance is a way to protect yourself and your family from financial loss. Generally, the premium for a larger insurance cover is much lower in terms of the amount paid. Insurance companies take this risk of paying a high cover for a small premium because very few insured people actually make insurance claims.

This is why you get insurance for a larger sum at a lower price. Any person or company can seek insurance from an insurance company, but the decision to provide insurance is at the discretion of the insurance company. The insurance company will evaluate the claim application to make a decision. Generally, insurance companies refuse to provide insurance to high risk applicants.

What are the types of insurance:

Life insurance and general insurance are the two main types of insurance coverage. General insurance can be further classified into sub-categories which divide into different types of policies.

1) Life Insurance: You can get life insurance to protect your family due to untimely death or death during the policy term. It pays a lump sum to the family in case of untimely death of the insured. It helps the bereaved family cope with the financial struggles that can occur in the absence of a breadwinner.

2) General Insurance: Ananya policies other than life insurance are considered as general insurance policies which include insurance coverage for home, health insurance, auto insurance, education insurance etc.

Below are some common insurance types;

1) Health Insurance: Health insurance is a contract that requires an insurer to pay some or all of an individual's health care costs in exchange for a premium.1 More specifically, health insurance typically pays for medical, surgical, prescription drug, and sometimes dental costs for the insured.

2)Vehicle Insurance: A car insurance policy covers expenses for damage to your vehicle due to accidents or even theft. These situations can cause real damage to your vehicle. To reduce the cost of these unexpected events, you need a car insurance policy.

3) Travel Insurance: Travel insurance is coverage designed to protect against risks and financial losses that may occur during travel. Risks range from minor inconveniences such as missed airline connections and delayed baggage to more serious problems including injury or major illness.

4) Property Insurance: Property insurance is an insurance that protects the physical goods and equipment of a business or home against loss from theft, fire and any other peril. … Generally, property insurance covers all risks of loss caused by fire, theft, wind, smoke, snow, lightning etc.

Benefits of Insurance:

1) Provides protection: Insurance coverage reduces the impact of losses that one incurs in hazardous situations. It provides financial compensation during financial crisis. It not only protects the policyholder from financial problems but also helps to check the resulting stress.

2) Provides certainty: Insurance coverage provides a sense of reassurance to policyholders. The insured pays a small portion of the income for this certainty that will help in the future. Hence, there is a certainty of handsome financial support against the premium. This policy will protect the buyer in case of accident, danger, or any vulnerability.

What are the primary benefits of an insurance policy?

• Perfect cover for your family after you're gone
• Compensation benefit
• Tax benefit
• Financial support after retirement
• For specific purposes
• For stable business operation

What are the disadvantages of an insurance policy?

• Hard terms document
• Long legal formalities