Insurance is a means of providing protection against financial loss in a great
variety of situations. It is a contract in which one party agrees to pay for
another party’s financial loss resulting from a specified event.
Insurance works on the principal of sharing losses. If you wish to be insured,
against any type of loss, agree to make regular payments, called premiums, to an
insurance company. In return, the company gives you a contract, the insurance
policy. The company promises to pay a certain sum of money for the type of loss
stated in the policy.
History
Insurance is thousands of years old. The Code of Hammurabi, a collection of
Babylonian laws of 1700BC, is believed to be the first form of credit insurance.
A borrower did not have to repay a loan if personal misfortune made it
impossible to do so. Insurance as we know it today can be traced to the Great
Fire of London in 1666, which devoured 13,200 houses. In the aftermath of this
disaster, Nicholas Barbon opened an office to insure buildings.
Types of Insurance
Insurance generally covers situations involving pure risk – that is, situations
in which only losses can occur. Such situations include fire, floods and
accidents. People also buy insurance to cover unusual types of financial losses
like, a dancer might insure her legs against injury. There are mainly three
types of insurance policies sold:
1. Life Insurance
A life insurance policy provides that the insurance company will pay a certain
amount when the person dies. This may be paid in a lump sum or in installments
to the beneficiary [people named by the policyholder to receive the death
benefit]. Some types of life insurance policies also enable policyholders to
save money. Such policies have a cash value. A policyholder may borrow money
against the cash value or surrender the policy for its cash value.
Annuities
These are savings plans sold by insurance companies to provide a fixed and
regular retirement income. If the annuitant [owner of the annuity] dies before
receiving the guaranteed number of payments, the insurance company must continue
the payments to the beneficiary.
Dividends
Some insurance policies refund part of the premiums in the form of dividends.
Such policies are called participating policies. An insurance company pays
dividends if the money it collected in premiums exceeds the amount needed to pay
benefits and administrative costs. Dividends may also include a share of the
profits the company earned on investments made with premium funds. Dividends are
most commonly paid on life insurance.
2. Private Health Insurance
Health insurance pays all or part of the cost of hospitalization, surgery,
laboratory tests, medicines, and other medical care. The rising cost of medical
care has increased the need for adequate health insurance. You could suffer a
major financial hardship without such coverage, especially in case of a serious
illness or accident.
Dental insurance is one of the fastest-growing types of health insurance. It
helps pay for a wide variety of dental services.
3. Property & Liability Insurance
Individuals and businesses buy property and liability insurance to protect their
assets against financial loss. Property insurance provides direct compensation
if a policyholder’s possessions are damaged, destroyed, or lost as a result of
perils. Liability insurance protects individuals and businesses against possible
financial losses if their actions result in bodily injury to others or in harm
to property owned by others.
The main types of individual coverage are:
• Homeowners Insurance
This provides protection against losses from damages to an owner’s home and its
contents.
• Automobile Insurance
This is the most widely purchased and most important kinds of insurance. Drivers
are legally responsible for any costs arising from accidents they cause. This
insurance protects a policyholder against financial losses from accidents.
Financial viability of Insurance Companies
Financial stability and strength of the insurance company should be a major
consideration when purchasing an insurance contract. An insurance premium paid
currently provides coverage for losses that might arise many years in the
future. For that reason, the viability of the insurance carrier is very
important. In recent years, a number of insurance companies have become
insolvent, leaving their policyholders with no coverage (or coverage only from a
government-backed insurance pool with less attractive payouts for losses).
How Insurance Is Sold
Most insurance companies sell policies through agents. Exclusive agents are
employees of an insurance company who sell only that company’s policies.
Independent agents sell policies for several companies.
Insurance - All The Basics
