Know What Is Insurance, Its Working, And The Principles Governing It

The world is full of uncertainties. Unpredictable and unfortunate circumstances can occur out of the blue. There can be any accident or mishap that can happen to you, your family, or your property. While there may be limited measures you can take to avoid such incidents, you can protect yourself from its financial consequences. That's where insurance comes in. But, what is insurance? Insurance is a contract between an insurance company and an individual or business. As per this contract, the insurance company agrees to pay a sum of money in case of damage or loss to the insured person or property. This amount is known as the sum insured or sum assured depending on the exact terms of coverage. In return, the insured person or business pays a premium to the insurance company. Let’s learn in detail about insurance and its nuances.

What is Insurance?

Insurance is a financial product that protects you against financial loss. It works by assessing and mitigating the risk of certain incidents & scenarios. When you buy an insurance policy, you are essentially paying a small amount of money periodically to help cover the cost of a larger loss that may happen in the future. For example, if you buy health insurance, you are essentially paying a pre-determined amount of money each year to help cover the cost of medical care that you would require in case of an illness or injury. The insurance company assesses your medical history, age, gender, etc. to determine the coverage and its premium. This makes it possible for you to avoid financial losses, even if the treatment required is too expensive. Claims are subject to terms and conditions set forth under general insurance policy.

Why Is Insurance Important?

According to Maslow's hierarchy of needs, safety and security rank as fundamental human priorities. Financial security, a key aspect of this, is largely supported by insurance. Insurance acts as a safety net, protecting individuals and families from unforeseen events such as the death of a breadwinner, unexpected medical expenses, or car accidents. Insurance alleviates the stress of uncertainty. For instance:

1. Life Insurance ensures financial stability for dependents if something happens to the policyholder.
2. Health Insurance mitigates the financial burden of rising medical expenses, including hospitalization costs and medication.

Insurance provides peace of mind, offering a financial cushion against sudden losses while helping manage emergency situations. Additionally, many insurance policies, such as health plans or term policies, offer tax-saving benefits, making them a dual-purpose tool for savings and protection.

Workings of Insurance

When you buy an insurance policy, you agree to pay a premium to an insurance company. In return, the insurance company promises to pay for your losses, up to the limits specified in your policy, if the insured event occurs. Claims are subject to terms and conditions set forth under general insurance policy. The cost of insurance varies depending on the type of insurance plan, its coverage amount, and your personal risk factors. For example, a person with a good driving record will typically pay less for motor insurance than a person with a history of accidents. When you are shopping for insurance, it is important to compare rates from different companies. You should also read the policy carefully to make sure you understand what is covered and what is not.

Key Components of an Insurance Policy

To better understand insurance, it’s important to examine its core components:

1. Premium: The premium is the amount a policyholder pays periodically to the insurer for coverage. It is influenced by various factors such as age, health, lifestyle habits (e.g., smoking), and the type of insurance.
2. Premium Payment Term: This is the duration over which premiums are paid. For example, in a 30-year term insurance policy with a 10-year premium payment period, the premiums are paid only for the first 10 years, while the policy remains active for 30 years.
3. Sum Assured: The sum assured is the pre-defined amount the insurer agrees to pay upon a claim. For life insurance, this is often referred to as the "life cover." In ULIPs (Unit Linked Insurance Plans), the sum assured includes the life cover along with accrued benefits.
4. Policy Limit: The policy limit is the maximum compensation the insurer will pay for covered losses. For life insurance, this is usually the sum assured, payable upon the policyholder's death or maturity of the policy.
5. Policy Term: This is the duration for which the policy provides coverage. The policy term is decided at the time of purchase and determines how long the insurance remains active.
6. Deductibles: Deductibles apply to general insurance policies, such as health or motor insurance. It is the amount the policyholder must pay out-of-pocket before the insurance kicks in. For instance, if a health insurance policy has a deductible of ₹50,000 and medical expenses are ₹1.5 lakh, the insurer pays ₹1 lakh while the policyholder covers ₹50,000.

Types of Insurance Available in India

1. General Insurance: Covers financial losses due to damage or loss of assets. It includes categories like travel, property, and motor insurance.
2. Life Insurance: Ensures financial security in case of the policyholder’s death or disability. It can also serve as a savings tool for future financial goals, such as retirement or children's education.
3. Health Insurance: Provides coverage for medical expenses, including hospitalization, health check-ups, ambulance services, and prescription medicines.
4. Motor Insurance: Covers damages to vehicles caused by accidents, natural disasters, or other incidents. It is mandatory in India for all vehicles.
5. Home Insurance: Protects against loss or damage to the house and its contents due to unforeseen events.
6. Fire Insurance: Covers damages resulting from fire caused by natural disasters or human activities.
7. Travel Insurance: Offers financial protection for incidents like medical emergencies, lost belongings, or flight cancellations during travel. It is often mandatory for visa applications in certain countries.

Principles of Insurance

There are several principles that govern the insurance industry. These principles include:

- Principle of Indemnity

This principle states that the insurance company should only pay the insured person the amount of money they have lost. Insurance is established to indemnify the policyholder for their losses and not to earn profits.

- Principle of Utmost Good Faith

This principle states that both the insured person and the insurance company must act in good faith when they are entering into an insurance contract. This means that the insured must disclose all relevant information to the insurer.

- Principle of Insurable Interest

This principle states that the insured person must have an insurable interest in the property or person that they are insuring. This means that the insured person must stand to lose something if the property or person is damaged or destroyed.

- Principle of Contribution

This principle states that if two or more insurance policies cover the same loss, the insurance companies will share the cost of the loss in proportion to the amount of coverage they each provide.

- Principle of Subrogation

Once the insurer has paid a claim to the insured, the insurer is subrogated to the rights of the insured. This means that the insurer can now pursue the person or entity that caused the loss to recover the money that it paid to the insured.

- Principle of Proximate Cause

The insurer is only liable for losses that are caused by a proximate cause. This means that the loss must be a direct and foreseeable result of the insured event.

- Principle of Loss Minimization

The insured has a duty to minimize their losses. This means that they must take reasonable steps to prevent or minimize the amount of loss that may occur.

Conclusion

Insurance is an important financial product that can help to protect you against financial loss. There are many different types of insurance available, each with its own set of benefits and features. For example, you can buy travel insurance before you go on a vacation or depart for your business trip. It provides you coverage for medical emergencies, loss of baggage, emergency evacuation, and much more. Claims are subject to terms and conditions set forth under general insurance policy. * *Standard T&C apply Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.