Insurance: Benefits, Main Types and How it Works Explained

Insurance is an agreement between a person and a company, where the company helps cover costs if something goes wrong, like an accident or damage. In exchange, the person pays regular fees, called premiums. The company uses money from many customers to make it cheaper for everyone.

Most people have insurance for things like their car, home, health, or life. Insurance helps pay for unexpected costs, like accidents, injuries, or property damage. It can also cover expenses if you're legally responsible for harming someone else or their property.

Types of Insurance

Insurance protects against the uncertainties and risks that can happen in a person’s life. For example, health insurance helps cover medical costs, while accident insurance provides coverage in case of accidents.

There are many types of insurance available through various companies. Here are the main types of insurance:

1. Life Insurance

Life insurance is a policy where the insurance company promises to pay a sum of money to the policyholder’s beneficiaries if the policyholder dies or at the end of the policy term. The policyholder pays premiums regularly to maintain the policy.

Different life insurance policies include:

• Whole Life Policy: This policy pays the insured amount to the nominee after the policyholder’s death. Some policies require premiums to be paid for the policyholder's lifetime, while others may require payment for a set number of years.

• Endowment Life Insurance: This policy pays a fixed sum to the insured after a set number of years or upon the insured’s death.

• Joint Life Policy: This policy covers two people, and the insurance amount is paid upon the death of either person. It is often used by couples or business partners.

• Annuity Policy: Under this policy, the insured receives regular payments (monthly, quarterly, or annually) after a certain age.

• Children’s Endowment Policy: This policy is taken by parents to save for their children’s future education or marriage. The insurer pays the amount when the child reaches a certain age.

2. General Insurance

General insurance covers all types of insurance except life insurance. It includes health insurance, car insurance, home insurance, fire insurance, marine insurance, and more.

• Fire Insurance: This policy covers damages caused by accidental fires. It usually lasts for one year and can be renewed annually. To make a claim, the fire must be accidental, and the loss must be real.

• Health Insurance: This provides financial protection against medical expenses. The insurer agrees to pay for treatment costs for certain illnesses. Health insurance is renewed yearly, and claims can be made through cashless treatment or reimbursement after treatment.

• Motor Vehicle Insurance: This is popular for vehicle owners. It covers liability for accidents caused by the vehicle and damage to others due to negligence.

• Cattle Insurance: This insurance covers the loss of cattle due to accidents, disease, or during pregnancy.

• Crop Insurance: This provides financial support to farmers if crops fail due to events like drought or flood.

• Burglary Insurance: This covers losses from burglary or theft, including damage to property or stolen goods.

These types of insurance help protect people and their property from financial losses due to unexpected events.

Principles of Insurance

Principles of Insurance are basic rules that guide how insurance works:

• Utmost Good Faith: Both the insurer and the insured must be honest and share all important information.

• Insurable Interest: The person buying the insurance must have a financial interest in what they are insuring. For example, you can insure your car but not someone else’s unless you have a financial stake in it.

• Indemnity: Insurance is meant to help the insured recover their loss, not to make a profit. It covers only the actual damage or loss.

• Subrogation: If the insurer pays for a loss, they can go after the person responsible for it to recover the money.

• Contribution: If someone has multiple insurance policies for the same risk, each insurer will share in the payment for the claim.

• Loss Minimisation: The insured must take steps to reduce the risk of loss, like installing safety measures.

• Risk Pooling: Insurance collects premiums from many people and uses this money to pay for the claims of those who suffer a loss.