What Is Insurance?
Insurance is a form of risk management primarily used to hedge against the risk of an uncertain loss. It is the equitable transfer of risk of a loss from one party to another in exchange for premium. The party bearing the risk of loss is called as insurer and the party whose risk of loss is covered is called as insured. The insurer sells the insurance policy to the insured and is called as the insurance company while the insured buys the insurance policy from the insurer and is called as the policyholder.
What Is Insurance Premium?
Insurance premium is the financial cost of obtaining the insurance cover. It is the amount of money paid by the insured i.e policyholder to the insurer i.e insurance company in exchange for the risk of loss covered by the insurance company. Insurance premium may be paid either as a lump sum or in installments during the period of the policy.
What Is Sum Assured?
Sum assured is the minimum amount of money that a life insurance company would pay to the beneficiaries of the policyholder if he dies during the policy period. It is also called as the coverage amount and is the total amount for which the policyholder is insured.
What Is Sum Insured?
Sum insured is the maximum amount of money that a general insurance company would pay to the policyholder in case of loss or damage to his property during the policy period. It is also called as the coverage amount and is the total amount for which the property of the policyholder is insured.
Types Of Insurance:-
Insurance is divided in two broad categories:-
(1) Life insurance
(2) General insurance
(1) Life Insurance:-
Life insurance is a contract between the life insurance company and the policyholder in which the life insurance company agrees to pay a fixed sum of money (sum assured) and bonus, if any to the beneficiaries (family members) of the policyholder if the policyholder dies during the period of policy and the policyholder agrees to pay a certain amount of premium to the insurance company.
There are various types of life insurance. Some of the important ones are given below:-
– Term life insurance:-
Term life insurance policy is for a specific period. If the policyholder dies within the period of policy then a fixed sum of money i.e sum assured is paid to the beneficiaries of the policyholder by the insurance company. If the policyholder survives the period of policy then nothing is paid by the insurance company. The premium paid by the policyholder is not returned back by the insurance company. Term insurance policies have the lowest amount of premium.
– Endowment policy:-
Endowment policy is also for a specific period. If the policyholder dies within the period of policy then a fixed sum of money i.e sum assured and also the bonus, if any is paid to the beneficiaries of the policyholder by the insurance company. If the policyholder survives the period of policy then he himself is paid the sum assured along with the bonus, if any by the insurance company. Endowment plans have higher amount of premium than the term life insurance policies.
– Whole life insurance:-
Whole life insurance policy does not have a specific time period. It does not end till the death of the policyholder. It provides cover throughout the life of the policyholder, provided he pays the premium amount regularly. After the death of the policyholder, his beneficiaries are paid a fixed sum of money i.e sum assured. The policyholder is not paid anything during his lifetime.
– Money back policy:-
In the money back policy the policyholder gets periodic payments from the insurance company during the period of policy. Some portion of the sum assured is paid out at regular intervals. If the insured person dies during the policy period, his beneficiaries get the full amount of sum assured without any deductions for the payments made till date. If the policyholder survives the period of policy, he gets the balance amount of sum assured after deducting the payments made till date.
– Unit-linked insurance plan:-
Unit-linked insurance plan (ULIP) is a combination of insurance and investment. In ULIP, a portion of the premium paid by the policyholder is used for providing life insurance cover and the remaining portion is invested in various equity and debt funds. The policyholder can choose the type of fund according to his investment need. If the policyholder dies during the policy period, his beneficiaries get the full amount of sum assured plus the returns earned on the amount invested in equity or debt fund. If the policyholder survives the period of policy, he only gets the returns earned on the amount invested in equity or debt fund and not the premiums paid by him.
(2) General Insurance:-
Any insurance other than the life insurance is called as general insurance. General insurance does not cover human life so it is also called as non-life insurance.
There are various types of general insurance. Some of the important ones are given below:-
– Home insurance:-
Home insurance is also called as homeowner’s insurance. It provides monetary compensation to the policyholder in the event of his home or its contents being damaged by fire, theft or accidents. Generally damages to the home caused by natural calamities such as floods and earthquakes are not covered in home insurance policies.
– Health insurance:-
Health insurance is also called as medical insurance. Health insurance provides monetary compensation to the policyholder for the medical expenses he incurs because of illness. It provides coverage for medicines, visits to the doctor, hospital stays, surgery, etc.
– Auto insurance:-
Auto insurance is also called as motor or vehicle insurance. Auto insurance provides monetary compensation to the policyholder for the loss or damages to his vehicle because of theft or accident. The vehicle may be a car, two-wheeler or commercial vehicle. Insurance on a car is called as car insurance, insurance on a two-wheeler is called as two-wheeler insurance and insurance on a commercial vehicle is called as commercial vehicle insurance. It is compulsory to purchase an auto insurance policy if a person owns any type of vehicle.
– Travel insurance:-
Travel insurance provides monetary compensation to the policyholder for the medical expenses he incurs while travelling and also other losses he incurs while travelling whether within his own country or other country. Travel insurance also provides coverage for trip cancellation, trip interruption, lost or stolen luggage, etc.
Principles Of Insurance:-
Following are the important principles of insurance:-
Utmost good faith:-
Both the parties to the insurance contract i.e insurer and insured should display good faith towards each other. The insurer must provide the insured complete, correct and clear information regarding the terms and conditions of the insurance contract and the insured must willingly disclose to the insurer all the material facts regarding the risk that is going to be covered by the insurer. If the insured hides any fact or gives false information to the insurer, the insurance contract becomes voidable at the discretion of the insurer. The principle of utmost good faith applies to both life and general insurance.
The insured must have insurable interest in the subject matter of insurance. The insurable interest is present when the insured person gets a financial or other type of benefit from the continuous existence of the insured object and the loss or damage to that insured object would cause the insured person to suffer a financial or other type of loss. The insured person must establish that he actually has a financial interest in preserving the object that is being insured. In case of life insurance, the insurable interest is present when the beneficiaries get a financial or other type of benefit from the continuous survival of the insured person and the death of the insured person would cause the beneficiaries to suffer a financial or other type of loss. So the principle of insurable interest applies to both life and general insurance.
Indemnity means an obligation to provide compensation for loss. According to principle of indemnity, insurance is used only for getting protection against unpredicted financial and other losses and not for making profit. The insurer agrees to compensate the insured only for the actual loss suffered and the amount of compensation paid by the insurer is in proportion to the incurred losses. The amount of compensation is limited to the amount mentioned in the insurance contract or the actual loss whichever is less and the compensation amount is not paid by the insurer if the loss does not happen during the period of policy. The principle of indemnity applies only to general insurance.
This principle is a corollary of the principle of indemnity and is applicable when the insured person has taken out more than one policy on the same subject matter. According to principle of contribution, the insured person can claim the compensation only to the extent of actual loss either from all the insurers proportionately or from any one insurer. If he gets full compensation from one insurer, then he does not have right to claim compensation from other insurers. The insurers have to share the compensation to be given to the insured in proportion to the amount insured by each of them.
This principle is another corollary of the principle of indemnity. Subrogation refers to the right of the insurer to stand in place of the insured person after the settlement of a claim of compensation. After the insurer compensates the insured for example, a damaged property and if the damaged property has any value left then the ownership right of such damaged property shifts to the insurer. If any third party is responsible for the damage to property of insured person because of which the claim of compensation was made then the insurer can take legal action against that third party for recovering the amount of compensation the insurer had to pay to the insured person. The insurer is entitled to get the right to the damaged property only to the extent of the amount of compensation he paid to the insured person and not more. If the insurer recovers from the third party, an amount in excess of the paid compensation then he has to pay this excess amount to the insured person.
According to this principle, to find out whether the insurer is liable to compensate for the insured person’s loss or not, the proximate or nearest cause of loss must be looked into. The loss caused to the insured person’ property can be because of more than one cause and the property may be insured against some causes and not against others. In such a case, the proximate or nearest cause of loss must be found out. If the proximate cause is covered in the insurance contract, the insurer is liable to pay compensation to the insured person and if the proximate cause is not covered, the insurer is not liable to pay compensation to the insured person. The principle of proximate cause applies only to general insurance.
According to this principle, it is the duty of the insured person to take all the steps possible to minimize the loss to the insured property. He should not behave in a careless manner just because there is an insurance cover for the property. The principle of loss minimization applies only to general insurance.
Insurance underwriters are the persons who decide whether to provide insurance cover to the potential clients or not and if it is to be provided then under what terms. They evaluate the risk of potential clients and decide whether to accept the risk and insure them or not. They also decide how much coverage should be given to the potential clients and how much they should pay for it i.e they decide the amount of sum assured/insured and premium of policy. Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether the company should accept the risk of insuring the potential clients or not. The aim of insurance underwriters is to protect the insurance company from risks that would result into a loss, if accepted.
Insurance Regulatory And Development Authority (IRDA):-
Insurance Regulatory and Development Authority (IRDA) is the regulator and developer of the insurance industry in India. IRDA was established in 1999 by an act of parliament known as IRDA act, 1999. The head office of IRDA is located in Hyderabad. The main objective of IRDA is to protect the interests of the insurance policyholders and to regulate, promote and ensure orderly growth of the insurance industry in India.
For more information about IRDA you can visit the site https://www.irda.gov.in