What Is Insurance In Simple Words, Why Do We Need Insurance, How Many Types of Insurance, What Is Insurance Deductible, FAQ About Insurance
We've all heard a lot about insurance. From a general perspective, insurance is something that keeps you or the things you have insured against bearing heavy financial losses. But there is more to it than meets the eye. We will discuss this in this post.
What Is Insurance?
In technical terms, this is a form of risk management in which the insured company transfers the cost of potential loss to another entity for small financial compensation. This compensation is called the premium. Simply, it's like paying money to a company to protect yourself from a possible future loss. That way, when something bad happens, the insurance company can help you deal with it.
Why Do We Need Insurance?
Everyone has this question in mind. Do I really need protection? Life is full of surprises. Some good, some bad. You need to be prepared for the worst. It helps you feel safe and secure. There can be many reasons where you may need help, such as serious illness, natural disasters, unexpected death of loved ones. Having adequate insurance in such situations is an important help in your financial situation. Therefore, one should choose the right type of protection according to one's needs.
Types of Insurance
1. Life insurance
Life protection is a traditional form of insurance, designed to protect you and your loved ones from sudden disasters or accidents. It was initially designed to protect the income of the families, but since then; it has evolved merely as a protection measure for protecting wealth or as an option tax plan. The need for life coverage is calculated on various factors such as the number of dependents, current savings, financial goals.
2. General Insurance
Any kind of coverage other than life falls into this category. Many types of insurance cover every aspect of your life according to your needs.
a. Health insurance
This includes your medical and surgical expenses that may arise during your lifetime. Generally, health insurance provides cashless services in registered hospitals.
b. Motor insurance
It covers vehicle damage and liability (two-wheeler or four-wheeler) against different scenarios. It protects the vehicle from damage and covers the liability of a third party as defined by law against the owner of the vehicle.
c. Travel guarantee
This protects you from emergencies or damage during your trip. It covers you against uncertain medical emergencies, theft or loss of goods, etc.
d. Home insurance
This includes contents within the home and/or within the scope of the policy. It protects the home from natural and man-made disasters.
e. Marine insurance
It covers goods, cargo, etc. from possible damage or loss during transportation.
f. Commercial insurance
It offers solutions for all sectors of the industry such as construction, automotive, food, electricity, technology, etc. Risk protection requirements may vary from person to person, but the basic function of an insurance policy remains more or less the same.
How does insurance work?
The most basic principle behind the concept of insurance is 'risk pooling'. Many people will take out insurance for a particular loss or damage, and for that, they will pay the required premium. This group of people can be called an insurance pool. Now, the company knows that the number of interested people is very high, and it is almost impossible for all of them to need insurance cover at the same time. In this way, it allows companies to raise money at regular intervals and if such a condition arises, settles the claim. The most common example of this is auto insurance. We all have car insurance, but how many of us have claimed it? This way, you pay and insure for the possibility of loss, and you will be paid if the event occurs.
So when you buy an insurance policy, you pay the policy regularly as a premium to the company. If/when you decide to make a claim, the insurance company will pay for all the losses that come under the policy. Companies use risk data to calculate the probability of an event. The higher the probability ratio, the higher the policy premium. This process is called underwriting. The company only seeks the actual value of the entity that is insured under the insurance agreement between the parties. For example, if you have insured your ancestral home for 5 million, the company will only consider the actual value of the house and will not entertain the emotional value of the home for you, because it is impossible to value emotions.
There are different terms and conditions for different policies, but the three main general rules are the same for all types.
- The cover provided for a property or item is for its original value and does not consider any emotional value.
- The possibility of a claim should be spread among the policyholders so that the insurance companies should be able to calculate the risk for the policy to determine the premium for the policy.
- The damage should not be intentional.
We've listed the first two points above. The third part is a little more important to understand.
An insurance policy is a special type of agreement between an insurance company and an insurer. This is a 'very good faith agreement'. This means that there is a vague but very important understanding between the insurer and the insured that is not usually found informal contracts. This understanding includes full disclosure and making no false or intentional claims. This 'good faith' duty is one of the reasons why a company may refuse to settle your claim if you have failed to provide all the required information. And this is a two-way street. The company has a 'good faith' responsibility with the client, and failure to comply can cause great inconvenience to the insurer.
Conclusions
Every sound financial plan supports risk protection. A suitable cover for you is determined by your needs and current financial situation. You should review and evaluate the costs involved in your policy and its impact on economic health. There are many offices involved, but the basic principles of working on many insurances are stable. You need to be clear about what kind of risk protection you are buying, why you are buying, and what is included in the contract. It is also important for both parties to work in good faith so that the entire insurance process is clear and hassle-free. And with any financial product, you must be talented and aware of the product you are buying and get the right advice.
FAQ
1. What is a risk pool?
A: Risk pooling means smaller groups of individual ponds with better insurance rates and coverage plans. Purchasing power is better because instead of referring to the insurance company as an individual, you are approaching it as a company. It can be created by companies or by employees through cooperative societies.
Insurance companies should also conduct risk pooling. They have come together with insurance coverage to protect each other.
2. Why should I buy insurance?
A: With the help of a policy, you can effectively transfer the potential loss to the insurance company. You can do this by exchanging fees known as insurance premiums. The advantage of insurance is that it protects your savings in case of unprecedented expenses.
3. Who can get benefits if I buy insurance?
A: Both want to get benefits when you buy an insurance policy. As an insurer, you are safe knowing that you will be protected from any possible harm. Similarly, the insurance company uses the amount you pay as a premium to create better money models and assets.
4. What should I look for when buying insurance?
A: When you buy an insurance policy, check the premium and coverage. It should be tailored to your needs.
5. What is 'underwriting'?
A: Underwriting is a service provided by insurance companies where companies act as guarantors for the insured. However, insurance companies may ask underwriters to provide security deposits as shares or benefits.
6. Are the terms and conditions differ based on the policies purchased?
A: Yes, the policy terms and conditions will depend on the type of insurance policy you purchase. There are two main types of insurance: life insurance and home insurance. Under general insurance is health, travel, home, corporate, and car insurance. Depending on the policy you purchase, your terms, conditions, and premiums will vary.
7. Can I buy more than one insurance policy?
A: Yes, one can buy different types of policies. There is also no limit to the number of life insurance policies an individual can purchase. However, for a car, you only need to buy one car insurance policy.
8. Is insurance required?
A: Yes, for car owners, it is important to buy a car insurance policy. Otherwise, you will face legal troubles.
9. What is the importance of health insurance?
A: A health insurance policy or medical insurance will protect you from unnecessary medical or hospitalization costs. If you buy medical insurance, your savings will be saved if you are suddenly admitted to the hospital. The insurance policy will cover all expenses, such as doctor's fees, hospitalization charges, ambulance fees, OT charges, and medicines. That way, your savings will be shielded.
10. What is an insurance premium?
A: The insurance premium is the amount that the insured has to pay to the insurance company from time to time to buy the policy. When you buy an insurance policy, the risk is transferred to the company. Therefore, the company charges a fee, known as an insurance premium.
11. How is the premium calculated?
A: Insurance companies use mathematical calculations and statistics to estimate the value of insurance premiums they will receive from their clients. Different parameters are used to calculate the premium of different insurance policies. For example, age, health, medical history, and other factors are considered when calculating premiums for a medical insurance policy. Similarly, for other insurance policies, life history and credit score are also considered.
12. Can I withdraw the premium if I do not claim insurance?
A: If you cancel your life insurance policy after paying regular premiums, you can claim at least a partial refund. However, this will depend on the terms and conditions of the insurance policy. But you cannot claim a premium when the policy expires.
13. What is an insurance deductible?
The money you give for covered health care services before your insurance plan starts to pay. With a 3,000 deductible, you pay the 1st 3,000 of covered services yourself. After you pay your deductible, you normally pay only a coinsurance or copay for covered services.
