What is insurance?

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

What is included in an insurance policy?

Every insurance policy has five parts: declarations, insuring agreements, definitions, exclusions and conditions. Many policies contain a sixth part: endorsements. Use these sections as guideposts in reviewing the policies. Examine each part to identify its key provisions and requirements.

Public and Private Insurance

Sometimes a distinction is made between public and private insurance. Public (or social) insurance includes Social Security, Medicare, temporary disability insurance, and the like, funded through government plans. Private insurance plans, by contrast, are all types of coverage offered by private corporations or organizations.

Types of Insurance for the Individual

Life Insurance

Life insurance provides for your family or some other named beneficiaries on your death. Two general types are available: term insurance provides coverage only during the term of the policy and pays off only on the insured’s death; whole-life insurance provides savings as well as insurance and can let the insured collect before death.

Health Insurance

Health insurance covers the cost of hospitalization, visits to the doctor’s office, and prescription medicines. The most useful policies, provided by many employers, are those that cover 100 percent of the costs of being hospitalized and 80 percent of the charges for medicine and a doctor’s services. Usually, the policy will contain a deductible amount; the insurer will not make payments until after the deductible amount has been reached. Twenty years ago, the deductible might have been the first $100 or $250 of charges; today, it is often much higher.

Disability Insurance

A disability policy pays a certain percentage of an employee’s wages (or a fixed sum) weekly or monthly if the employee becomes unable to work through illness or an accident. Premiums are lower for policies with longer waiting periods before payments must be made: a policy that begins to pay a disabled worker within thirty days might cost twice as much as one that defers payment for six months.

Homeowner’s Insurance

A homeowner’s policy provides insurance for damages or losses due to fire, theft, and other named perils. No policy routinely covers all perils. The homeowner must assess his needs by looking to the likely risks in his area earthquake, hailstorm, flooding, and so on. Homeowner’s policies provide for reduced coverage if the property is not insured for at least 80 percent of its replacement costs. In inflationary times, this requirement means that the owner must adjust the policy limits upward each year or purchase a rider that automatically adjusts for inflation. Where property values have dropped substantially, the owner of a home (or a commercial building) might find savings in lowering the policy’s insured amount.

Automobile Insurance

Automobile insurance is perhaps the most commonly held type of insurance. Automobile policies are required in at least minimum amounts in all states. The typical automobile policy covers liability for bodily injury and property damage, medical payments, damage to or loss of the car itself, and attorneys’ fees in case of a lawsuit.

Types of Business Insurance

Workers’ Compensation

Almost every business in every state must insure against injury to workers on the job. Some may do this through self-insurance that is, by setting aside certain reserves for this contingency. Most smaller businesses purchase workers’ compensation policies, available through commercial insurers, trade associations, or state funds.

Automobile Insurance

Any business that uses motor vehicles should maintain at least a minimum automobile insurance policy on the vehicles, covering personal injury, property damage, and general liability.

Property Insurance

No business should take a chance of leaving unprotected its buildings, permanent fixtures, machinery, inventory, and the like. Various property policies cover damage or loss to a company’s own property or to property of others stored on the premises.

Malpractice Insurance

Professionals such as doctors, lawyers, and accountants will often purchase malpractice insurance to protect against claims made by disgruntled patients or clients. For doctors, the cost of such insurance has been rising over the past thirty years, largely because of larger jury awards against physicians who are negligent in the practice of their profession.

Business Interruption Insurance

Depending on the size of the business and its vulnerability to losses resulting from damage to essential operating equipment or other property, a company may wish to purchase insurance that will cover loss of earnings if the business operations are interrupted in some way by a strike, loss of power, loss of raw material supply, and so on.

Liability Insurance

Businesses face a host of risks that could result in substantial liabilities. Many types of policies are available, including policies for owners, landlords, and tenants (covering liability incurred on the premises); for manufacturers and contractors (for liability incurred on all premises); for a company’s products and completed operations (for liability that results from warranties on products or injuries caused by products); for owners and contractors (protective liability for damages caused by independent contractors engaged by the insured); and for contractual liability (for failure to abide by performances required by specific contracts).

Benefits of life insurance

Income replacement for years of lost salary.

Paying off your home mortgage.

Paying off other debts, such as car loans, credit cards, and student loans.

Providing funds for your kids’ college education.

Helping with other obligations, such as care for aging parents.

What is the best age for life insurance?

Typically, you get the best rates in your 20s or 30s. That’s because an insurer is taking on less risk when insuring a young person in good health. That said, affordable and high-quality coverage is available across a variety of age ranges.

What are the disadvantages of insurance?

Insurance company shows bias to the insured as it does not compensate all types of losses.

It consumes more time to provide financial compensation because lengthy legal formalities.

It does not provide enough financial facilities like the bank does

Frequently ask question

What is insurance simple words?

Insurance is a term in law and economics. It is something people buy to protect themselves from losing money. … In exchange for this, if something bad happens to the person or thing that is insured, the company that sold the insurance will pay money back.

What is insurance and its benefits?

The life and property of an individual are surrounded by the risk of death, disability or destruction. These risks may result in financial losses. Insurance is a prudent way to transfer such risks to an insurance company.

What are the 7 types of insurance?

7 Types of Insurance are; Life Insurance or Personal Insurance, Property Insurance, Marine Insurance, Fire Insurance, Liability Insurance, Guarantee Insurance. Insurance is categorized based on risk, type, and hazards.

What is the role of insurance?

The function of insurance is to safeguard against financial loss by having the “losses of the few” paid by “contributions of the many” that are exposed to the same risk. Insurance companies invest premium dollars collected annually in a wide range of investments.

What are the features of insurance?

Features of Insurance:

A large number of insured persons: To spread the damage easily and easily, a large number of individuals should be insured. …

Sharing risks: …

Price of Risk: …

Cooperative Equipment: …

Payment on contingency: …

Payment of forty loss: …

Amount of Payment: …

Life Insurance:

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Insurance is a contract, it is a legal agreement between two parties i.e. the individual and insurance company. In this, the insurance company assured to make good the losses of the insured on happening of the insured contingency. The contingency is the event which causes a loss. It can be the destruction of the property or death of the policyholder. It’s called a contingency because there’s an uncertainty regarding happening of the event. The insured pays a premium in return for the agreement made by the insurer.

Insurance

How Insurance work
The insured and the insurer get a legal agreement for the insurance, which is called the insurance policy. The insurance policy has details about the circumstances and conditions under which the insurance company will pay out the insurance amount to either the nominees or the insured person.

Insurance is a way of protecting your family and yourself from a financial loss. Commonly, the premium for a huge insurance cover is much lower in terms of money paid. The insurance company takes this risk of giving a big cover for a small premium because little insured people actually end up claiming the insurance. This is why you get insurance for a high amount at a less price.

Any company or individual can seek insurance from an insurance company, but the decision to give insurance is at the responsibility of the insurance company. The insurance company will estimate the claim application to make a decision. Commonly, insurance companies refuse to give insurance to big-risk applicants.

Summary
The insured and the insurer get a legal agreement for the insurance. Any company or individual can seek insurance from an insurance company, but the decision to give insurance is at the responsibility of the insurance company.

Insurance Policy Component
When selecting a policy, it is necessary to comprehend how insurance works. A firm understanding of these concepts goes a long way in helping you select the policy that best suits your requirements. There are three components (policy limit, premium, and deductible) to most insurance policies that are important.

Policy limit
The policy limit is the maximum amount a company will pay under a policy for a covered loss. Maximums may be set per loss or injury, per period, or over the life of the policy, also known as the lifetime maximum.

Generally, bigger limits carry bigger premiums. For a typical life insurance policy, the maximum amount the company will pay is attributed to as the face value, which is the amount paid to a beneficiary upon the death of the individual.

Premium
A policy’s premium is its price, generally indicated as a monthly cost. The premium is determined by the company based on your business’s risk profile, which may involve creditworthiness. Here is the question arises what is an insurance premium. Insurance premium is the sum amount of the money that is agreed to be paid by the individual to the company. This is a policy that is adopted by both the parties while choosing an insurance policy.

For instance, if you own various expensive automobiles and have a history of destructive driving, you will probably pay more for an auto policy than someone with a single mid-range sedan and a perfect driving record. But, different companies may charge different premiums for identical policies. So finding the price that is right for you need some legwork.

Deductible
The deductible is a distinct amount the policy-holder must pay out-of-pocket before the company pays a claim. Deductibles serve as determent to huge volumes of small and insignificant requirements.

Deductibles can apply per-claim or per-policy depending on the company and the type of policy. Policies with very large deductibles are generally less expensive because the high out-of-pocket expense commonly results in fewer small requirements.

Summary
There are three components to the insurance policies: Deductible, premium and policy limit. The deductible is a distinct amount the policy-holder must pay out-of-pocket before the company pays a claim. A policy’s premium is its price, generally indicated as a monthly cost. The policy limit is the maximum amount a company will pay under a policy for a covered loss.

Types of Insurance

Health Insurance
Health insurance covers the cost of hospitalization, prescription medicines and visits to the doctor’s office. The most general and useful policies, provided by many employers, are those that cover 100 percent of the costs of being hospitalized and 80 percent of the charges for a doctor’s services and medicine. Generally, the policy will contain a deductible amount; the company will not make payments until after the deductible amount has been reached.

Does health insurance make life happier?
While discussing the health insurance it is a basic question that does health insurance make life happier?. The health insurance make our life happier and more safe. Health insurance is a most beautiful and valuable gift to the mankind from the nature. Health is a state of complete mental, physical and social well-being , it is not merely the absence of infirmity or disease. Health insurance coverage can provides us the “peace of mind” as it eliminate the risks of catastrophic healthcare expenses.

Disability Insurance
A disability policy pays a assured percentage of an employee’s wages monthly or weekly if the employee becomes unable to work through an accident or a illness. Premiums are lesser for policies with longer waiting periods before payments must be made: a policy that starts to pay a disabled worker within thirty days might cost double as much as one that defers payment for six months.

Life Insurance
On your death life insurance provides for your family or some other named beneficiaries. Two common kinds are available: whole-life insurance gives savings as well as insurance and can let the individual collect before death, term-life insurance gives coverage only during the term of the policy and pays off only on the individual’s death.

How does life Insurance work
While discussing the life insurance it is essential to discuss how does life insurance work. There are various factors involved in the working process of life insurance. These factors are choice of a life insurance policy, payment method and selection of a beneficiary and claim for the death benefit. Our life is the result of the choices we have made. Different policies are suitable for different people. Payment of premiums can either be made monthly or on annually basis depending upon the policy plan. According to the requirements of life insurance policies, beneficiaries have to submit the death certificate of policyholders along with other proofs for death and identification.

Homeowner’s Insurance
A homeowner’s policy gives insurance for losses or damages due to theft, fire, and other named perils. No policy routinely covers all perils. The homeowner must assess his requirements by looking to the likely risks in his area hailstorm, earthquake, flooding, and so on. Homeowner’s policies give for decreased coverage if the property is not insured for at least 80 percent of its replacement costs.

In rise times, this needs means that the owner must adjust the policy limits upward each year or purchase a rider that automatically adjusts for rise. Where property values have dropped significantly, the owner of a home might find savings in lowering the policy’s insured amount.

What does homeowners insurance cover
While discussing the homeowner’s insurance it is essential to discuss what does homeowners insurance cover.. The basic homeowners insurance covers the financial loss caused by weather such as hailing or lightning. Homeowners insurance covers the catastrophic events such as explosions or fire. This insurance basically protect us against earthquakes, flooding, war, power failure or intentional loss.

Automobile Insurance
Automobile insurance is the most general held kind of insurance. Automobile policies are needed in at least minimum amounts in all states. The general automobile policy covers liability for property damage and bodily injury, loss or damage of the car itself, medical payments, and attorneys’ fees in case of a lawsuit.

The other Liability Insurance
In this disputable society, a person can be claim for just about anything: an accident on the ball field, a slip on the walk, a untrue and harsh word spoken in anger. A personal liability policy covers many kinds of these risks and can give coverage in enormous of that provided by automobile and homeowner’s insurance. Such umbrella coverage is generally fairly inexpensive, perhaps $250 a year for $1 million in liability.

Summary
Types of insurance includes: Health insurance, life insurance, homeowner’s insurance, disability insurance, automobile and the other liability insurance.

insurance

Types of Business Insurance

Property Insurance
In property insurance no business should take a chance of leaving unprotected its buildings, machinery, permanent fixtures, inventory, and the like. Several property policies cover loss or damage to a company’s own property or to property of others stored on the premises.

Worker’s Compensation
In worker’s compensation insurance almost every business in every state must assure against injury or damage to workers on the job. Some may do this through self insurance that is, by setting aside assured reserves for this contingency. Most smaller businesses purchase workers’ compensation policies, available through state funds, trade associations or commercial insurers.

Business Interpretation Insurance
In business interpretation depending on the size of the business and its susceptibility to losses resulting from destruction to necessary operating equipment or other property, a company may wish to purchase insurance that will cover loss of earnings if the business operations are interrupted in some way by a loss of power, loss of raw material supply, strike, and so on.

Malpractice Insurance
In malpractice insurance professionals such as lawyers, accountants and doctors will frequently purchase malpractice insurance to protect against requirements made by discontented clients or patients. For doctors, the cost of such insurance has been increasing over the past thirty years, hugely because of larger jury awards against physicians who are inattentive in the practice of their profession.

Automobile Insurance
In automobile insurance any business that uses motor vehicles should maintain at least a minimum automobile insurance policy on the general liability ,property damage, covering personal injury,and vehicles.

Liability Insurance
In liability insurance businesses face risks that could result in significant liabilities. Many kinds of policies are available, including policies for landlords, owners, and tenants, for contractors and manufacturers , for a company’s completed operations and products ,for contractors and owner’s and for contractual liability.

Few years ago, different kinds of individual and business coverage had to be purchased independently and frequently from different companies. Today, most insurance is available on a package basis, through single policies that cover the most essential risks. These are frequently called multiperil policies.

Summary
Types of business insurance include: Property insurance, worker’s compensation, business interpretation business, malpractice insurance, automobile insurance and liability insurance.

Why Insurance is getting Important
Here are three reasons why the insurance is getting important.

1. Insurance decreases stress during difficult times
Insurance decreases stress during the difficult times no matter how difficult you try to make your life better, an unexpected event can completely turn things upside down, leaving you physically, financially and emotionally strained. Having suitable insurance helps in the sense that at least you don’t have to think about money during such a hard time, and can focus on recovery.

For instance, suppose someone or you in your family had a heart attack and needs prompt hospitalization. Such treatments at best hospitals can cost lakhs. So having health insurance in this case, saves your stress and worries of arranging money. With insurance in place, any financial stress will be taken care of, and you can focus on your recovery.

2. Insurance ensures family’s financial Stability
Insurance ensures family’s financial stability no matter how much you have managed to save or what your monthly income is, an unforeseen event can burn a large hole in your pocket or can simply peril your family’s financial future.

For instance, if you do not have sufficient life insurance, your family might have to go through financial problems, if you were to meet with an untimely death. Though no amount of money can replace the damage of loved ones, having life insurance would save them from going through financial problems. Simultaneously if your family or you do not have sufficient health insurance, then high medical bills during any treatment can properly shake your finances.

So it is important that you cover your family your self with an sufficient amount of insurance.

3. Insurance brings peace of mind
Insurance brings the premium you pay to the insurance company is the price that assured that the insurance company will cover the loss in case of an unexpected event. And, that assurance that your risk is covered brings peace of mind.

For instance, let’s suppose you die an untimely death at a time when you still have various milestones to achieve like children’s marriage, their education, a retirement corpus for your family etc. Also there is a credit as a housing loan. Your untimely death can put your family in a hand to mouth situation. However if you would have bought term insurance considering all these factors, your family would be able to sail through during the difficult times.

Summary
Three reason’s of why the insurance is getting important are: Insurance decreases stress during difficult times, Insurance ensures family’s financial Stability and Insurance brings peace of mind.

What are the tax benefits on insurance
Aside from the security and safety benefits of buying insurance, there are also the income tax benefits that we can avail.

  • Medical insurance premium of up to 25,000 for your family and for yourself and 25,000 for your parents can be claimed as a tax-saving deduction under section 80D.

  • Life insurance premium of up to 1.5 lakh can be claimed as a tax-saving deduction under Section 80C.

These requirements have to be made at the time of e-filing income tax returns.

Summary
Aside from the security and safety benefits of buying insurance, there are also the income tax benefits that we can avail on insurance.

tax benefit

Benefits of Insurance
Insurance benefits organizations, individuals and society in more ways than the average person realizes. Some of the benefits of insurance are following:

  • The first benefit of insurance is managing cash flow uncertainty. Insurance gives payment for covered damages when they occur. That’s why, the uncertainty of paying for damages out-of-pocket is decreases significantly.

  • The most important benefit of insurance is the payment of damages. An insurance policy is a agreement used to indemnify organizations and damages for covered damages.

  • The benefit of insurance is the efficient use of a company’s resources. Insurance makes it unimportant to set apart a huge amount of money to pay for the financial consequences of the risk exposures that can be insured. This allows that money to be used more accurately.

  • The uncommon benefit of insurance is complying with legal needs. Insurance meets contractual and statutory needs as well as gives evidence of financial resources.

  • The uncommon, essential benefit of insurance is support for the company’s credit. Insurance facilitates loans to organizations and individuals by assuring that the granter will be paid if the collateral for the loan is damaged or destroyed by an individual event. This decreases the granter’s uncertainty of default by the party borrowing funds.

  • The important benefit of insurance is developing risk control activity. Insurance policies gives incentives to implement a damage control program because of policy premium and requirements savings incentives.

Summary
Insurance benefits organizations, individuals and society in more ways than the average person realizes. The first benefit of insurance is managing cash flow uncertainty. The important benefit of insurance is developing risk control activity.

Disadvantages of Insurance
There are some disadvantages of the insurance and these are following:

  • The main disadvantage of insurance is that most kinds of insurances have changing rates of premiums, and you should be very careful about it. Before buying a policy, make sure you know from the starting if you have a assured premium throughout the policy, or if it changes from time to time in relation to rise. You should weigh out if you prefer a fixed premium or you’d like to take the risk, and more essentially, determine the amount you can afford to spare on the contract.

  • Insurance can be expensive. A major fear of insurance buyers is the price they have to pay. Sometimes, depending on the policy and significant factors that affect the cost, such as credit score , buying insurance can be expensive. But if bought at a right time, with right amount of coverage and the right reason you might actually get the deserving price.

Summary
There are some disadvantages of the insurance. The main disadvantage of insurance is that most kinds of insurances have changing rates of premiums, and you should be very careful about it.

Frequently Asked Questions

What is insurance in simple words?
Insurance is a term in economics and law. It is something people buy to protect themselves from losing money. In exchange for this, if something bad happens to the thing or person that is insured, the company that sold the insurance will pay back money.

Why insurance is needed?
Insurance companies invest the funds firmly, so it can grow and pay out when there is a requirement. Insurance helps you own a home because mortgage lenders need to know your home is protected. It covers day-to-day costs while you focus on your recovery and health.

What are the 5 parts of an insurance policy?
Insurance policy have five parts: insuring agreements, declarations, exclusions, definitions and condition. Most policies contain a six part endorsements.

What are the features of insurance?
The features of insurance are following:

  • Price of risk

  • Payment of forty loss

  • Life insurance

  • Amount of payment

  • Cooperative equipment

  • Sharing risk

What are the primary functions of insurance?
The primary functions of insurance are:

  • Prevention of loss

  • It provides capital

  • It improves efficiency

  • It helps economic progress

  • Risk sharing

Conclusion
Insurance is a contract, it is a legal agreement between two parties i.e. the individual and insurance company. In this, the insurance company assured to make good the losses of the insured on happening of the insured contingency. There are three components (policy limit, premium, and deductible) to most insurance policies that are important. Insurance plan will help people pay for hospitalization, medical emergencies and medical care required in the future. The financial loss to the family due to the unexpected death of the sole earner can be covered by insurance plans. Insurance along with benefits also have some disadvantages.

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