Basic of Insurance

What is insurance?

Insurance is defined as a contract that assures the insured a sum of money in case of any untoward incident.

 

Why should we buy insurance?

We buy insurance because it protects the economic value of an asset. An asset is valuable because it provides some sort of benefit to us. This benefit could be in any form (income, stability, facilities etc.).

Every asset is expected to sustain through a certain period of time. We, as asset owners, are aware of this typical lifetime and plan our activities accordingly. However, sometimes, due to some unforeseen or unfortunate event, the asset may be lost before its expected time period. This may cause losses and inconvenience to us.

For example: Anand owns a building and is using the space in this building to manufacture soaps. He runs the risk that the building and the machinery used for manufacturing could be damaged in an earthquake, flood, or a fire. This can cause huge disruptions in his income.

Similarly, a family which is dependent on one member to earn their livelihood may face a difficult situation if that member of the family is permanently disabled or dies in an accident.

Insurance, therefore, is a mechanism that helps to reduce the adverse effects of these difficult situations. It promises to pay us, the owner/ the beneficiary, of the asset a certain sum if a loss occurs.

Insurance enables any of us who suffer a loss or accident to be compensated for the effects of their misfortune. The payments provided are from a fund of money contributed by us, the holders of the individual insurance policies. In other words, individual risks are pooled and shared, With each policyholder customer making a contribution to a common fund.

Insurance, therefore, is a business of sharing; it makes an unbearable loss bearable.

 

What is life insurance?

Life Insurance is an insurance cover taken for a human life. In life insurance, the insured (customer) agrees to pay a set premium for a certain number of years to the insurer (us). Payouts by us, the insurer happen as and when either of these two events occur-

  • The agreed number of years lapse, or at ‘Maturity’.
  • Unfortunate death of the insured.