Meaning of Insurance and Its Types

What is Insurance?

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.

An entity which provides insurance is known as an insurer or underwriter. The loss may or may not be financial, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

The insured receives a contract, in form of a policy , which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer from the insured for the coverage is called the premium .

The insurer may hedge its own risk by taking out reinsurance , whereby another company agrees to carry some of the risk, especially if the primary insurer deems the risk too large for it to carry.

 

TYPES of INSURANCE

Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as perils.

  1. LIFE INSURANCE

Life coverage provides a monetary benefit to a decedent’s family or other designated beneficiary, and may specifically provide for income to an insured person’s family, burial, funeral and other final expenses. Life coverage policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity . In most states, a person cannot purchase a policy on another person without their knowledge.

 

2. AUTO INSURANCE

This protects the policyholder against financial loss in the event of an incident involving a vehicle they own, such as in a traffic collision.

Coverage typically includes:

Property coverage, for damage to or theft of the car

Liability coverage, for the legal responsibility to others for bodily injury or property damage

Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.

3. GAP INSURANCE

This covers the excess amount on your auto loan in an instance where your underwriter does not cover the entire loan. Depending on the company’s specific policies it might or might not cover the deductible as well. This coverage is marketed for those who put low down payments , have high interest rates on their loans, and those with 60-month or longer terms. Gap coverage is typically offered by a finance company when the vehicle owner purchases their vehicle, but many auto insurance companies offer this coverage to consumers as well.

4. HEALTH

Health insurance policies cover the cost of medical treatments. Dental coverage, like medical coverage, protects policyholders for dental costs. In most developed countries, all citizens receive some health coverage from their governments, paid for by taxation. In most countries, health coverage is often part of an employer’s benefits.

5. LIABILITY

Liability is a very broad superset that covers legal claims against the insured. Many types of coverage include an aspect of liability coverage. For example, a homeowner’s coverage policy will normally include liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile coverage also includes an aspect of liability that indemnifies against the harm that a crashing car can cause to others’ lives, health, or property. The protection offered by a liability policy is twofold: a legal defense in the event of a lawsuit commenced against the policyholder and indemnification (payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies typically cover only the negligence of the insured, and will not apply to results of wilful or intentional acts by the insured.

6. PROPERTY

Property insurance provides protection against risks to property, such as fire , theft or weather damage. This may include specialized forms of coverage such as fire, flood, earthquake, home damages.

7. CASUALTY

Casualty insurance insures against accidents, not necessarily tied to any specific property.

This is a very broad aspect but you need to know what it means.

8. BURIAL

This is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral . The Greeks and

Romans introduced this in 600 CE when they organized guilds called “benevolent societies” which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.

9. INCOME PROTECTION

Workers’ compensation, or employers’ liability insurance, is compulsory in some countries

Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards.

Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.

Long-term disability ┬ácovers an individual’s expenses for the long term, up until such time as they are considered permanently disabled and thereafter underwriter will often try to encourage the person back into employment in preference to and before declaring them unable to work at all and therefore totally disabled.

Disability overhead allows business owners to cover the overhead expenses of their business while they are unable to work.

Total permanent disability provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life.

Workers’ compensation replaces all or part of a worker’s wages lost and accompanying medical expenses incurred because of a job-related injury.

Many believe insurance is just a risk transfer mechanism wherein the financial burden which may arise due to some fortuitous event is transferred to a bigger entity called an ‘Insurer’ by way of paying premiums.

Whatever you believe, it’s important you acquire protection against unforeseen circumstances.