What is Insurance?
Insurance is a legal agreement between two parties i.e. the insurance company (insurer) and the individual (insured). In this, the insurance company promises to make good the losses of the insured on happening of the insured contingency. The contingency is the event which causes losses. It can be the death of the policy holder or damage/ destruction of the property. It’s called a contingency because there’s an uncertainty regarding happening of the event. The insured pays a premium in return of the promise made by the insurer.
Types of Insurance
Basically there are two types of Insurance, as presented below:
- Life Insurance: The 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 an Assurance, as the event, i.e. death of the insured is certain. The payment of the policy amount on the maturity will be made in one shot (lump sum) or periodical installments, i.e. annuity.
- Whole Life Assurance: Whole Life Assurance is one in which the policy amount becomes due to 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 term insurance policy.
- Annuity: When the policy gets matured, the amount is paid in regular installments, rather than in lump sum.
- General Insurance: Any insurance apart from life insurance comes under general insurance. In this type of insurance, the policy holder gets the compensation only when the loss is caused to hi, due to the reasons indicated in the policy. It is also called as non-life insurance. It is classified into 3 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, upto an agreed amount.
- Marine Insurance: When in an insurance contract, the insurer 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 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 lump sum for the year.
The Bottom line: As we move through life, find a partner, raise a family, and may be starting a business, the importance of insurance in a long term plan increases. That’s because insurance is all about providing a financial safety net that helps you to take care of yourself and those who love when you need it the most.
