Insurance - Definition, Types and Terminology_2023

 

What is Insurance?

Insurance is a legal agreement between two parties – the insurer and the insured, also known as insurance coverage or insurance policy. The insurer provides financial coverage for the losses of the insured that s/he may bear under certain circumstances. Let’s discuss in detail what is insurance and how it works, the insurance benefits, and types. 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. The amount of money paid by an individual or organisation for insurance (cover/protection) to an insurance company is called the premium.

Benefits of insurance

• Insurance enables individuals and organisations not to suffer the financial loss that would result from the occurrence of an insured risk. Insurance therefore;
• Provides payment for covered losses when they occur. 
• The uncertainty of paying for losses  out of-pocket reduces significantly thus managing cash flow.
• Gives a peace of mind thereby enabling investments of larger amounts of money
• Provides financial protection to dependants in case of death of the breadwinner (Life insurance)
• Provides savings for future prosperity in case of life insurance
• It’s a means of mobilising investment funds. When insurance companies collect premiums, they invest those premiums in a variety of investment vehicles, and pay claims when they occur.
• Controls and reduces losses through surveys and provides risk improvement advice to the public and those insured
• Enables continuity of micro businesses that depend on the insured business
• Reduces individual burden on society such as education of the children after the death of the breadwinner.
• Reduces the burden of loss since many people shoulder the loss thus providing a form of social cooperation.

MOTOR THIRD PARTY (MTP) INSURANCE

This is a mandatory motor insurance cover which is required by all vehicles, vans or motorcycles for private or commercial use. MTP insurance was introduced by the Motor Vehicle Insurance (Third Party Risks) Act in 1989. The law provides for compulsory insurance against third party risks (bodily injury or death) in respect of the use of vehicles. Only government owned vehicles are exempted from having this motor insurance cover.

Who is a "Third Party" under this cover?
1st Party
The owner of the Vehicle, Van or Motorcycle.
2nd Party
The insurance company, that has issued the insurance policy (i.e. the risk-carrier).
3rd Party
Any other person who may be affected by the contract. The Third Party may be any road user such as the vehicle passenger or pedestrian involved in the accident (the accident victim).

HEALTH INSURANCE

You can buy health insurance for yourself or for your family that may include your spouse, parents, siblings, and children. Some insurance companies have tie-ups with hospitals. So here you can use your policy number to avail of cashless services in-network hospitals. In other cases, you can claim reimbursement for hospitalisation and treatments. Do check the coverage of the type of disease/illness/health issue. Also, verify what type of costs are covered.

Health insurance, also known as private medical insurance, is designed to ensure that if you need medical treatment in future, you won’t need to worry about paying for the cost of the treatment.  

If you are treated privately, health insurance will pay all or some of your bills. It should get you diagnosed and treated quickly, as well as offer you a prompt referral to a consultant and admission to a private hospital at a time and place that is convenient for you. With health insurance, you will have a choice of private hospital from an agreed list provided by your insurer.

LIFE ASSURANCE

A Life assurance policy is a contract between an insurance company and an individual, where payment of a claim by the insurance company in return for premiums paid depends in some way on the duration of a human life or lives. You can take out life assurance on your own life or the life of other individuals, such as your spouse or business partner, provided you can show that there is a financial relationship between you. A joint life first-death policy pays out on the first death of one of the lives assured. A joint life last-survivor policy pays out on the death of the last of the lives assured.

Term Insurance is the most common form of life insurance where you pay the premium for the pre-decided term. If you pass away within the term period, the money you are insured of is given to the family. But it remains with the insurance company if you survive through the term policy’s tenure. Unlike term plans, whole life insurance or endowment plans pay upon maturity as well if you outlive the term. Some Pension Plans, or post-retirement plans also carry insurance coverage. One is to pay the premium up to a certain time. You receive the promised amount upon maturity. The family gets the money upon the untimely death of the insured.

The benefit of a life assurance policy is that it guarantees that if a life-assured dies, the life company will pay out a cash sum. This money will be paid to the person paying the premiums or, if the sole life-assured has died, the proceeds will be passed into his or her estate and distributed according to the terms of the will. If there is no will, the sum will be handled according to the laws of intestacy. 

Source :

Insurance Terminologies - Part 1