We all have heard a lot about Insurance. As a general perception, Insurance is something which keeps you or the things that you have insured sustaining a heavy financial loss. But there is a lot more to this than just a cover for something that you feel is capable of taking a damage. We will look into this in a detailed manner.
In technical terms, it is a form of risk management in which the insured entity transfers the cost of possible loss to another entity in exchange for a small monetary compensation. This compensation is called as premium. In simple terms, it is like paying a lump-sum amount to an entity to get yourself protected from a possible future loss. Thus, when there is a case of some misfortune, the insurer aids you to get through the situation.
Everyone has this question in their mind. Do I really need protection? Life is full of surprises; some good ones, some bad ones. You need to be prepared for the worst that may come to you. It helps you to have that sense of security and calmness. There can be many reasons where you might need help, like critical illness, natural disaster, unexpected death of loved ones, etc. Being adequately insured in such situations provides a significant helping hand to your financial condition. Thus, one should opt for a correct type of protection according to their needs.
Life protection is one of the traditional forms of insurance, designed to protect you and your loved ones from sudden calamity or disaster. It was initially designed to safeguard the income of the families. But since then, it has evolved from being just a protection measure to an option for wealth preservation or Tax Planning. Need for a life cover is calculated on various factors like the number of dependents on a person, current savings, Financial goals etc.
Any type of coverage apart from life comes under this category. There are many different types of insurance which cover almost every aspect of your life according to your needs:
It covers your medical and surgical expenses that might arise in the course of your life. Generally, health insurance provides cashless facilities in the listed hospitals.
It covers the damages and liabilities associated with a vehicle (two-wheeler or four-wheeler) against various scenarios. It offers protection against damage to vehicle and covers for any third party liability stated by law against the owner of the vehicle.
It covers you from the emergencies or loss occurred during your travel. It covers you against unseen medical emergencies, theft or loss of baggage, etc.
It covers the house and/or contents inside depending upon the scope of the policy. It secures the house from natural and man-made disasters.
It covers the goods, cargos, etc. from the potential loss or damage during transit.
It offers solutions for all fields of the industry like construction, automotive, food, power, technology, etc.
The risk protection needs can differ from person to person but the basic working of an Insurance policy remains more or less the same.
The most basic principle behind the concept of Insurance is 'Risk Pooling'. A large number of people are ready to get Insured against a particular loss or damage, and for that, they are ready to pay the desired premium. This group of people can be called as the Insurance-pool. Now, the company knows the number of interested people is very large and the probability of all of them needing the insurance cover at the same time is almost impossible. Thus, this allows the companies collect money at regular intervals and also settle the claim if and when such condition arrives. The most common example of this is Auto Insurance. We all have a vehicle Insurance, but how many of us have claimed for it? Thus, you pay for the probability of the damage and get insured and you will be paid if the given event occurs.
So when you buy an Insurance policy, you pay a regular amount to the company as a premium for the policy. If and when you decide to make a claim, the insurer will pay out the damages that are covered by the policy. The companies use risk data to calculate the probability of the event - you are seeking insurance for - happening. Higher the probability, higher the premium of the policy. This process is called underwriting i.e. process of evaluating the risk to be insured. The company only looks for the actual value of the entity that is insured according to the Insurance contract struck between the parties. For eg., you have insured your ancestral home for 50 lakhs, the company will only consider the actual value of the house and will not entertain any emotional value the house may hold for you, as it is near impossible to put a price on emotions.
There are different terms and conditions for different policies, but the three main general principles remain the same for all types:
We have covered the first two points above. The third part is a bit more important to understand.
An Insurance policy is a special type of contract between the insurer and the insured. It is a contract of 'utmost good faith'. This means there is an unspoken but very important understanding between the insurer and the insured person which normally do not exist in regular contracts. This understanding includes the duty of full disclosure and not to make any false or deliberate claims. This duty of 'good faith' is one of the reasons that a company might refuse to settle your claim if you have failed to notify them all the required information. And this a two-way street. The company has the 'good faith' obligations toward the client and failing to act on it can expose the insurer to a lot of trouble.
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Every sound Financial plan is backed by risk protection. A suitable cover for you is determined by your needs and current financial situation. You should review and recheck the expenses covered in your policy and evaluate its impact on your current financial health. There are a lot of ifs and buts involved but the basic fundamentals of the working remain constant over all types of Insurance. You must be clear about what type of risk protection you are buying, why are you buying and what all is covered in the contract. It is also important for both the parties to act in 'utmost good faith' so that the whole process of insurance is crystal clear and less troublesome. And as the case with every financial product, you must be well-versed and informed about the product you are buying and get sound advice from your financial consultant.