What is Insurance

Every day we hear about Insurance, Insurance company, Term Insurance, Mediclaim Insurance, Property Insurance, etc. However, what insurance really is. This article will give you an insight about the word Insurance, its meaning and its use. Insurance is a tool for protection from unexpected losses. It is an arrangement or a system by which a company provides / agrees to provide compensation against the insured event. The insured event may be death, disability, illness or any specified loss, etc. It is an agreement between the insurer and the insured, where the insurer is the company, which provides insurance while the insured is the person who wants to be insured against any unwanted event.

Some of the basic terms of Insurance are as follows: -

* Insurer: The Company, which provides insurance coverage, is called as the Insurer.

* Insured: The person who intends to purchase an insurance policy for securing his own life is called as the Insured person. Another definition from the insurance company’s perspective is that “The person to whom the insurance company provides the insurance coverage is called as the insured person”

* Policy: An agreement between the policyholder and the insurance company where the insurance company agrees to pay the sum assured upon occurrence of the insured event.

* Sum Assured: The risk coverage or the insurance amount agreed by the insurance company to pay in the event of occurrence of the insured event is called as the Sum Assured.

* Premium: The amount which a policy holder pays to the insurance company for getting an insurance policy is called as premium.

* Policy Term: The tenure for which the insurance company is issuing the policy.

* Nominee: The beneficiary or the representative of the insured person who receives the sum insured in the event of death of the insured person.

* Maturity: The end of the policy term is called as maturity of the policy.

* Claim: A request made by the policyholder or the nominee to the insurance company for compensation against the occurrence of insured event is called as an insurance claim.

Insurance is classified under two main categories; one is Life Insurance while the other one is Non-Life Insurance/General Insurance. Now a days there is one more type of insurance category added which is the Health Insurance. Earlier only Non-Life or General Insurance companies used to sell Health insurance policies generally called as Mediclaim policies. The following paragraphs will give some insights about the insurance categories.

 

Life Insurance:

A life insurance policy is a contract between the insurance company and the person who intends to purchase the policy for securing the future of his family in the event of his sudden death. Life insurance policy provides financial coverage against the sudden death of the insured person. Sum Assured is provided to the legal heirs or the nominee often called as beneficiaries of the insured if the person dies during the policy term provided that, the policy is in force. The insurance company provides a Sum Assured or the insurance amount either in lump sum or in deferred installments to the beneficiaries. A life insurance policy is useful in replacing the loss of income if the insured person dies within the policy term. The proceeds of the life insurance policy ensure a stable life of the family in the event of untimely demise of the insured person. There are many types of life insurance policies such as Term Life, Whole Life, Endowment, Unit Linked, Money back and many more.

There are some additional benefits attached to the life insurance policies, which are also called as Riders. The riders may be Accidental Death Benefit Rider, Accidental Disability Rider, Waiver of Premium Rider, Monthly Income Benefit Rider and Critical Illness Benefit Rider. The riders are generally attached as additional benefits to the policy right at the inception of the policy and cannot be added later. Extra premium has to be paid for the Riders. Once the rider benefits are paid in a policy the riders cease to exist and the premium for the same is discontinued.

Details about the various types of life insurance policies are as follows: -

Term Plan: The Term plan is the most preferred type of life insurance plan now a days. A Term plan may be a refundable or non-refundable type of policy. Even though the insurance companies provide both refundable and non-refundable premium options, the non-refundable term plan is widely sold. Unlike other insurance plans only Sum Assured is payable on death of the insured person. There are no Maturity benefits.

Whole Life Insurance Plan: Whole Life insurance policy is a type of insurance policy, which provides insurance coverage to the policy holder/insured person for the entire life. Even though the whole life plan provides a life time coverage, still the maximum premium paying term is 40 years or up to the age of 60 years whichever is earlier in policies provided by many insurance companies. The bonus rate of whole life plans is higher than other endowment plans.

Endowment Plan: Endowment plan is a type of insurance policy, which provides a sum assured to the policyholders in case of death within the policy term or on maturity of the policy, generally with some addition called as bonus. The regular bonus is declared at every policy anniversary often called as "Reversionary bonus". Non-guaranteed bonus also called as "Terminal Bonus" is declared in endowment policies at the end of the policy term. Terminal bonus is generally paid only if the policy term is more than or equal to 15 years. 

Unit Linked Plan: Unit Linked insurance plan or ULIP is a type of insurance policy where the premium paid by the policyholder is invested in different types of funds through units. Number of Units are purchased at prevailing rates of the NAV. The NAV is declared on daily basis. The insurance company recovers the insurance/mortality and other administrative charges by selling units. Unit Linked plans serve investment and insurance under a single integrated plan. 

Money Back Plan: Money back insurance plan is a type of insurance plan where the insured person gets a percentage of sum assured at regular intervals, instead of getting a lumpsum at the end of the policy term. Money back plan provides the benefits of liquidity unlike other insurance plans. The regular money back is called as "Survival Benefit". While the survival benefits are paid at regular intervals, bonus amount is paid only at the maturity of the policy or on death of the insured person.

Non Life Insurance:

Non Life Insurance is any type of insurance, which does not fall under the Life Insurance category. It is also called as General Insurance. While life insurance categories are explained earlier in this article, non-life insurance includes Auto or Motor insurance, Property insurance, Accidental insurance, Fire insurance, Marine insurance, Aviation insurance, Crop insurance and many other types of such insurances. General Insurance companies provides compensation against the insured events such as Motor vehicle Accident, Fire breakout, Ship sinking, Airplane crash and Crop destruction due to natural calamities.   

Details about the various types of nonlife/general insurance policies are as follows: -

Motor insurance: Motor vehicle covers your vehicles against accidents, theft, damage, third party liability, etc. It is classified under Two wheeler and Four wheeler insurance. the four wheeler insurance is further divided into personal and commercial categories. 

Property insurance: Property insurance policy provides protection against risk to property such as fire, theft, weather damage. It also includes protection from Floods, earthquakes, lightnings and other natural calamities. Property insurance is divided under Home insurance, Shop insurance, Factory insurance and so on.

Accidental insurance:  Accidental Insurance protects an individual or a family in the event of an accident resulting in Death, Temporary Partial Disability, Temporary Total Disability, Permanent Partial Disability & Permanent Total Disability. Accidental insurance provides compensation in the event of an accident resulting in death and disability of the policy holder or the insured person. It also compensates your medical expenses resulting in hospitalization due to accident.

Fire insurance: It is an insurance where the insurer agrees to pay a compensation against damages caused by fire. Fire insurance policy reimburse expenses for replacement or repair of any property or assets such as Car, Furniture, Appliances, etc in case of fire. It must however be noted that the fire must be accidental and any loss or damage must be due to burning triggered by accidental fire. 

Marine insurance: It is a type of insurance which covers losses or damage caused to ships, cargo vessels, cruise ships, etc. Marine insurance also covers onshore and offshore properties such as containers, terminals, ports, Hull, etc.

Aviation insurance: It is a type of insurance which covers all the risks involved in the aviation industry. It provides coverage for hull losses, liability for passenger injuries, environmental risks and third party damage caused by aircraft accidents or crashes.

The above article gives us detailed information about insurance, its basic components, Life insurance and its types, Non Life insurance and its types and other such information. Here we come to know that insurance is very important in everybody’s life and it acts as a safety net that financially protects you and your family in the event of any mishappenings or unfortunate event which may result into emotional or financial loss. Even though emotional loss may not be recovered through insurance but it compensates the insured person financially.