Insurance : Definition of Insurance, Types of Insurance, Nature and Importance of insurance

Concept of Insurance

Insurance is an instrument of distributing the loss of few among many. Insurance is a cooperative device 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.

In other words, Insurance is a contract between two parties where one party (the insurer) agrees to pay to the other party (the insured) or his beneficiary a certain sum upon a given contingency against which insurance is sought.

There are several principles of insurance that is required to keep in mind when both parties the insurer and the insured come together for the insurance contract.

Nature of Insurance

Insurance includes the following natures-

- Sharing of risk;
- Co-operative device;
- Value risk;
- Payment at contingency;
- Amount of payment;
- Large numbered and insured person;
- Insurance is not gambling;&
- Insurance is not a charity.

Importance of Insurance

1. Spreading of risk
Insurance facilitates spreading of risk from the insured to the insurer. The basic principle of insurance is to spread risk among a large number of people. A large number of persons get insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of funds of the insurer.

2.Provides Safety and Security to Individuals and Businesses 
Insurance provides financial support and reduces uncertainties that individuals and businesses face at every step of their life-cycles. It provides an ideal risk mitigation mechanism against events that can potentially cause financial distress to individuals and businesses. For instance, with medical inflation growing at approximately 15% per annum, even simple medical procedures cost enough to disturb a family’s well-calculated budget, but a Health Insurance would ensure financial security for the family. In case of business insurance, financial compensation is provided against financial loss due to fire, theft, mishaps related to marine activities, other accidents etc.

3. Life insurance encourages savings
Insurance does not only protect against risks and uncertainties, but also provides an investment channel too. Life insurance enables systematic savings due to payment of regular premium. Life insurance provides a mode of investment. It develops a habit of saving money by paying premium. The insured get the lump sum amount at the maturity of the contract. Thus life insurance encourages savings.

4. Promotes Economic Growth 
The Insurance sector makes a significant impact on the overall economy by mobilizing domestic savings. Insurance turn accumulated capital into productive investments. Insurance also enables mitigation of losses, financial stability and promotes trade and commerce activities those results into sustainable economic growth and development. Thus, insurance plays a crucial role in the sustainable growth of an economy.

5. Source of collecting funds
Large funds are collected by the way of premium. These funds are utilised in the industrial development of a country, which accelerates the economic growth. Employment opportunities are increased by such big investments. Thus, insurance has become an important source of capital formation.

6. Generates Long-term Financial Resources
The Insurance sector generates funds by way of premiums from millions of policyholders. Due to the long-term nature of these funds, these are invested in building long-term infrastructure assets (such as roads, ports, power plants, dams, etc.) that are significant to nation-building. Employment opportunities are increased by big investments leading to capital formation in the economy.

Types of Insurances

1. Life Insurance; &
2. General Insurance.

What is Life Insurance

Life insurance is a contract that offers financial compensation in case of death or disability. Some life insurance policies even offer financial compensation after retirement or a certain period of time. Life insurance, thus, helps you secure your family’s financial security even in your absence. You either make a lump-sum payment while purchasing a life insurance policy or make periodic payments to the insurer. These are known as premiums. In exchange, your insurer promises to pay an assured sum to your family in the event of death, disability or at a set time.

Life insurance can help you support your family even after retirement. Depending on what it covers, Life insurance can be classified into various types:

Term Insurance-  It is the most basic type of insurance.
- It covers you for a specific period.
- Your family gets a lump-sum amount in the case of your death.
- If, however, you survive the term, no money will be paid to you or your family.
Whole Life Insurance

- It covers you for a lifetime.
- Your family receives a certain sum of money after your death.
- They will also be entitled to a bonus that often accrues on such amount.

Endowment Policy-    - Like a term policy, it is also valid for a certain period.
- A lump-sum amount will be paid to your family in the event of your death.
- Unlike a term plan, you get the maturity proceeds after the term period.

Money-back Policy-  - A certain percentage of the sum assured will be paid to you periodically throughout the term as survival benefit.
- After the expiry of the term, you get the balance amount as maturity proceeds.
- Your family gets the entire sum assured in case of death during the policy period. This is regardless of the survival benefit payments made.

Unit-linked Insurance Plans (ULIPs)-  - Such products double up as investment tools.
- A part of your premium goes towards your insurance cover.
- The remaining amount is invested in Debt and Equity.
- A lump-sum amount will be paid to your family in the event of your death.

Child Plan-  - This ensures your child’s financial security.
- In the event of your death, your child gets a lump-sum amount.
- The insurer pays the premium amounts after your death.
- Your child will continue to get a certain sum of money at specific intervals.

Pension Plans-  - This helps build your retirement fund.
- You can get a regular pension amount after retirement.
- In the case of your death, your family can claim the sum assured.

Tax Benefits

  • Life insurance not only ensures the well-being of your family, it also brings tax benefits.
  • The amount you pay as premium can be deducted from your total taxable income.
  • However, this is subject to a maximum of Rs 1.5 lakh, under Section 80C of the Income Tax Act.
  • The premium amount used for tax deduction should not exceed 10% of the sum assured.

What is General Insurance?

A general insurance is a contract that offers financial compensation on any loss other than death. It insures everything apart from life. A general insurance compensates you for financial loss due to liabilities related to your house, car, bike, health, travel, etc. The insurance company promises to pay you a sum assured to cover damages to your vehicle, medical treatments to cure health problems, losses due to theft or fire, or even financial problems during travel.

Simply put, a general insurance offers financial protection for all your assets against loss, damage, theft, and other liabilities. It is different from life insurance.

What are the types of General Insurance available? / What all can be insured?

You can get almost anything and everything insured. But there are five key types available:

Health Insurance
Motor Insurance
Property Insurance.
Marine Insurance.
Fire Insurance.
Liability Insurance.
Guarantee Insurance.
Social Insurance.

Health Insurance

This type of general insurance covers the cost of medical care. It pays for or reimburses the amount you pay towards the treatment of any injury or illness.

It usually covers:

The treatment of critical illnesses
Medical bills prior to or post hospitalisation
Day care procedures like Cataract operations
You can also opt for add-on benefits like:

Maternity cover: Your health insurance covers you for the costs related to childbirth. This includes pre-delivery check-ups, hospitalisation during delivery, and post-natal care.

Pre-existing diseases cover: Your health insurance takes care of the treatment of diseases you may have before buying the health insurance policy.

Accident cover: Your health insurance can pay for the medical treatment of injuries caused due to accidents and mishaps.

Your health insurance can also help you save tax. Your premium payment can reduce your taxable income.

Motor Insurance

Motor insurance is for your car or bike what health insurance is for your health.

It is a general insurance cover that offers financial protection to your vehicles from loss due to accidents, damage, theft, fire or natural calamities

You can also get motor insurance for your commercial vehicles.

In India, you cannot drive or ride without motor insurance.

Let’s look at the two key types:

1. Car Insurance

It’s precious—your car. You paid lakhs of rupees to buy that beauty. Even a single scratch can be painful, forget about bigger damages.

Car insurance can reduce this pain for a few thousand money.

How it works:

Pay Annual  Premium>>Get Car Insurance Cover>>Insurer pay for damages during the                                                                                                                                                 whole year.

2. Two-wheeler Insurance

This is your bike’s guardian angel. It’s similar to Car insurance. You cannot ride a bike or scooter in India without insurance.

Property Insurance

Under the property insurance property of person/persons are insured against a certain specified risk. The risk may be fire or marine perils, theft of property or goods damage to property at the accident.

Marine Insurance

Marine insurance provides protection against the loss of marine perils.

The marine perils are; collision with a rock or ship, attacks by enemies, fire, and captured by pirates, etc. these perils cause damage, destruction or disappearance of the ship and cargo and non-payment of freight.

So, marine insurance insures ship (Hull), cargo and freight.

Previously only certain nominal risks were insured but now the scope of marine insurance had been divided into two parts; Ocean Marine Insurance and Inland Marine Insurance.

The former insures only the marine perils while the latter covers inland perils which may arise with the delivery of cargo (gods) from the go-down of the insured and may extend up to the receipt of the cargo by the buyer (importer) at his go down.

Fire Insurance

Fire Insurance covers the risk of fire.

In the absence of fire insurance, the fire waste will increase not only to the individual but to the society as well.

With the help of fire insurance, the losses arising due to fire are compensated and the society is not losing much.

The individual is preferred from such losses and his property or business or industry will remain approximately in the same position in which it was before the loss.

The fire insurance does not protect only losses but it provides certain consequential losses also war risk, turmoil, riots, etc. can be insured under this insurance, too.

Liability Insurance

The general Insurance also includes liability insurance whereby the insured is liable to pay the damage of property or to compensate for the loss of persona; injury or death.

This insurance is seen in the form of fidelity insurance, automobile insurance, and machine insurance, etc.

Social Insurance

The social insurance is to provide protection to the weaker sections of the society who are unable to pay the premium for adequate insurance.

Pension plans, disability benefits, unemployment benefits, sickness insurance, and industrial insurance are the various forms of social insurance.

Insurance can be classified into 4 categories from the risk point of view.

Personal Insurance

The personal insurance includes insurance of human life which may suffer a loss due to death, accident, and disease

Therefore, personal insurance is further sub-classified into life insurance, personal accident insurance, and health insurance.

Property Insurance

The property of an individual and of the society is insured against loss of fire and marine perils, the crop is insured against an unexpected decline in deduction, unexpected death of the animals engaged in business, break-down of machines and theft of the property and goods.

Guarantee Insurance
The guarantee insurance covers the loss arising due to dishonesty, disappearance, and disloyalty of the employees or second party. The party must be a party to the contract.

His failure causes loss to the first party.

For example, in export insurance, the insurer will compensate the loss at the failure of the importers to pay the amount of debt.

Other Forms of Insurance

Besides the property and liability insurances, there are other insurances that are included in general insurance.

The examples of such insurances are export-credit insurances, State employees’ insurance, etc. whereby the insurer guarantees to pay a certain amount at certain events.

This insurance is extending rapidly these days.

Miscellaneous Insurance

The property, goods, machine, Furniture, automobiles, valuable articles, etc. can be insured against the damage or destruction due to accident or disappearance due to theft.

There are different forms of insurances for each type of the said property whereby not only property insurance exists but liability insurance and personal injuries are also the insurer.

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