Insurance is a contract between two parties, the company assuring in the contract of insurance to compensate is known as insurer/assurer. While the person to whom such assurance is given is known as insured/ assured . in this contract, the insurer is liable to compensate for the specific loss to the insured who has paid regular consideration an insurance premium.
Understanding How Insurance Works
There is a multitude of different types of insurance policies available, and virtually any individual or business can find an insurance company willing to insure them – for a price. The most common types of personal insurance policies are auto, health, homeowners, and life. Most individuals persons have at least one of these types of insurance, and vehicle insurance is required by law. Business requires a special type of insurance policies that insure against specific types of risk faced by a particular business.
Types of insurance
Life insuranceThe insurance that covers the risk of the life of the insured is called life insurance. In this, the nominee will get the policy amount, upon the death of the insurer. This is also called as an Assurance, as the event, death of the insured is certain. The payment of the policy amount on the maturity will be made in one shot or periodical installment, annuity. Whole life insurance: Whole life assurance, is one in which the policy amount becomes due for payment on the death of the insured.
Term Life Assurance: The insurance policy in which the amount has to be paid on the maturity of the specified term, for instance, 10 years or 15 years, then it is called as a term insurance policy.
Annuity: When the policy gets matured, the amount is paid in regular installments, rather than in lump sum.
General InsuranceAny insurance apart from life insurance comes under general insurance. In this type of insurance, the policyholder gets the compensation only when the loss is caused to him, Due to the reasons indicated in the policy. It is also called as non- life insurance. It is classified into three categories :
Fire Insurance: A contractual arrangement in which the insurer promises to indemnify the loss caused to the goods and property of the insured due to fire, up to an agreed amount.
Marine Insurance: When in an insurance contract, the insurance undertakes to compensate the ship or cargo owner against the risks associated with the marine adventure, It is called as marine insurance. It is further divided into cargo insurance, hull insurance, and freight insurance.
Miscellaneous Insurance: Apart from those discussed above, there are other types of the general insurance business which cover different types of risks. It includes burglary insurance, Credit insurance, Motor vehicle insurance, Loss of Profit insurance, Fidelity insurance, etc.
The life insurance and general insurance differ in the way that life insurance covers the life risk, Whereas general insurance does not cover the risk of life. Secondly, the premium is paid at regular intervals in life insurance, but in general insurance, the premium is paid in a lump sum of the year.
Function of insurance
The function of insurance is to spread the loss caused by a particular risk over a number of persons, who are exposed to it and who agree to insure themselves against the risk. The function of insurance can be categories two-part.
Primary Function• Insurance provides certainty
• Insurance provides protection
• Risk sharing
Secondary Function• Prevention of loss
• It provides capital
• It improves efficiency
• It helps economic progress
Principles of insurance
Principle of Utmost Good Faith
Principle of Insurable interest
Principle of Indemnity
Principle of Contribution
Principle of Subrogation
Principle of Mitigation of Loss
Principle of Causa Proxima
Importance of insurance
Provides protection against the occurrence of uncertain events.
Device for eliminating risks and sharing losses.
Co-operative method of spreading risks.
Facilitates international trade.
Serves as an agency of capital formation.
Source of employment.
Planning for life stage needs.
Safe and profitable long term investment.
Assured income through annuities.
The uncertainty of business losses is reduced.
Business efficiency increased with insurance.