What Is Insurance?
Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.
Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.
Insurance helps you protect yourself against risks like a house fire, car accident or burglary. You can also get insurance that pays you money if you get too ill to work or to provide for your family if you die.
The term Insurance Bundle means that a customer has more than one insurance product with the same insurance company (e.g. home and auto insurance). Normally insurance companies offer more than one insurance product and therefore they are interested in selling multiple products to one customer. In order to encourage customers to buy more products from them, insurers often suggest several products in a bundle that offer some discount (also called bundle discounts).
Most property and casualty insurance companies tend to actively sell home and auto insurance products, but they may also offer bundles with products such as boat insurance, seasonal home insurance, RV insurance, and motorcycle insurance, etc.
Leaving with family for a weekend getaway? Just think of all the assets you possess like your home, car, jewellery and other valuables. What if you lose all of it due to some fire, theft or a natural calamity? It would be all gone even before you might think about saving it.
Safety is the prime concern and avoiding any mess falls as the next. At times, you might end up facing some unexpected losses for which you were completely unaware. What then? Do you definitely look for some security system? Or just leave things on destiny?
Well! Nothing would work except a security system that backs us. In other words, we need an insurance cover.
“To insure is to protect and indemnify. It does not mean Prevention of loss”.
What are the different types of Insurance?
There is a distinction between the types of insurance one is life insurance and other is non-life or general insurance. As an individual, you will be covered under the Life insurance policy. The reimbursement under the policy can be withdrawn on the event of death or maturity of the policy.
On the other hand, a General Insurance Policy will pay for the losses that may occur during the policy period only.
What is specialty insurance?
From motorcycle insurance to boat insurance, protect your unique items.
We hear it all the time: “Specialty insurance? What’s that and why do I have it or why do I need it?”
In simple terms, specialty insurance coverage is exactly what it sounds like: It’s insurance that can be purchased for items that are special or unique. Specialty insurance policies are important for items that are not typically covered under other insurance policies.
What is All-Risks Cover?
An extended warranty is also known as all-risks cover and is an optional extra to standard home insurance. It covers damage or loss of valuables even when they are outside of your home and sometimes when they are taken abroad. All risks cover usually fills in any gaps that may exist in your contents insurance.
The Benefits of All-Risk Cover are:
✔ It is the most comprehensive form of contents insurance offered by most insurers
✔ Don’t have to list every item to be insured
✔ Covers the cumulative value of items
✔ Can list very valuable items separately
✔ Items may be insured while you are on holiday at home or abroad
What is life insurance?
Life insurance is designed to provide a source of income for your children and other dependants should you die or become disabled.
Most life insurance policies pay a lump sum, which allows your family to continue meeting important financial obligations, including:
- Mortgage, rent and car payments.
- Everyday living expenses and bills.
- Funeral and estate-related costs.
- Education expenses for your children.
- Any outstanding debts.
So, why life insurance? Because losing a loved one or watching them suffer through illness is distressing enough without adding financial strain to the mix. You can learn more about life insurance for families here.
What are the different types of life insurance?
There are four main types of life insurance designed to cover a range of different scenarios:
- Life insurance. Term life insurance (or death cover) is replacement income for your spouse and dependants. It pays a pre-agreed amount in a lump sum at the time of death.
- Trauma cover. This is insurance for critical illnesses, such as cancer, strokes and heart attacks. It is paid in a lump sum to cover medical expenses and ongoing recovery and rehabilitation costs.
- Total & permanent disability (TPD). This covers you for permanent loss of work due to serious illness or injury. It is paid in a lump sum.
- Income protection. This provides up to 75 per cent of your regular work income due to illness or injury for a specified period. Unlike other types of life insurance, income protection is paid in regular monthly instalments.
The right life insurance policy for you depends on your income, age and family situation. Use the iSelect Life Insurance Calculator to work out how much cover you might need.
What Is Index Insurance?
Index insurance is a relatively new but innovative approach to insurance provision that pays out benefits on the basis of a predetermined index (e.g. rainfall level) for loss of assets and investments, primarily working capital, resulting from weather and catastrophic events. Because index insurance doesn’t necessarily require the traditional services of insurance claims assessors, it allows for the claims settlement processes to be quicker and more objective.
Before the start of the insurance period, a statistical index is developed. The index measures deviations from the normal level of parameters such as rainfall, temperature, earthquake magnitude, wind speed, crop yield and livestock mortality rates.
Insurance is important for development because uninsured losses lock vulnerable populations in a vicious cycle of destitution. Unfortunately, agricultural insurance and disaster insurance are either unavailable or prohibitively expensive in many developing countries. Combined with other risk management solutions such as extension services, adequate farm management and quality farming inputs, index insurance can be an appropriate solution to overcome these obstacles.
Rahul is super confused about all the jargons that are thrown on him whenever he reads insurance; Rahul avoided insurance, but then with his first job came his first car and then the company offered him Health insurance as a part of his package and Rahul had a Motor insurance and also a Health Insurance but didn’t know the importance of them. Unfortunately, he met with an accident and his car was damaged and Rahul had a minor injury. At this point of time, the 2 sheets of paper took care of his expenses!! This experience was an eye-opener and he decided to meet his college buddy Rohan who had got a job in one of the Top Financial company as a wealth manager. Below is the conversation they had.
Rahul:- Hey Buddy please simplify and tell me “What is insurance and how does it work?”
It’s very simple Rohan – You just get overwhelmed with the terms – let me explain you.
Insurance is a policy taken to cover the risk of financial loss, i.e. it provides protection against financial loss that may occur. In your case, it was financial loss due to damage of your car which was covered because you had an insurance policy.
However such loss may be due to death of the insured, damage to a property, liabilities or expenses incurred in car accident, etc. The entity from which insurance is taken is known as the insurance company or an insurance company.
The person who buys the insurance is known as the insured or policyholder. You have to pay a fee to the insurance company to subscribe for the insurance; such fee is known as an insurance premium. Insurance premium is the financial cost payable in instalments or in lump sum for obtaining an insurance cover. You must pay the premium at pre-defined intervals. Non- payment of premium results in cancellation of insurance policy.
To purchase an insurance policy, you have to subscribe for insurance by paying premium at the prescribed intervals. On subscription, you receive a contract or an insurance policy document that you get from the insurance company which contains the terms and conditions subject to which financial loss you suffer will be compensated. In case any loss is suffered by you, you need to claim along with the required documents to the insurance company. The insurance company after conducting an investigation and on being satisfied with the loss approves the claim. Once the claim is approved, you receive the compensation & you are paid for the damage you have claimed.
Insurance can be broadly classified into two categories, Life insurance and general insurance.
What is insurance? Insurance is a way to manage your risk. When you buy insurance, you purchase protection against unexpected financial losses. The insurance company pays you or someone you choose if something bad happens to you.
If you have no insurance and an accident happens, you may be responsible for all related costs. Having the right insurance for the risks you may face can make a big difference in your life. An insurance policy is a written contract between the policyholder (the person or company that gets the policy) and the insurer (the insurance company). The policyholder is not necessarily the insured. An individual or company may get an insurance policy (making them the policyholder) that protects another person or entity (who is the insured). For example, when a company buys life insurance for an employee, the employee is the insured, and the company is the policyholder.
How does insurance reduce your financial risk? Imagine you’re driving your car and you hit a deer, which damages your car. If you have the right kind of auto insurance policy, the insurance company will pay the costs of the car repairs (minus the deductible — the portion you have to pay). Now, imagine a water pipe bursts in your bathroom, ruining everything in that room and in the bedroom next to it. Typically, if you have homeowner’s or renter’s insurance, the insurance company will pay to replace some or all of the damaged property, once you pay your deductible. Insurance policies will only pay for things that are described in the policy. So, it’s important to read a policy carefully before you buy it, so you’ll know exactly what’s covered.
BUILDING BLOCKS STUDENT HANDOUT 2 of 3 What is insurance?
How does an insurance policy work? Insurance policies are often in place for a specific period of time. This can be referred to as the policy term. At the end of that term, you need to renew the policy or buy a new one. When you buy an insurance policy, part of your responsibility includes paying a fee called a premium. Some premiums are paid monthly, like health insurance. Others may be paid once or twice a year, like auto or homeowner’s insurance. The cost of your premium generally depends on how much of a risk you are to the insurance company. In addition to the premiums, most insurance policies include a deductible. That’s the amount you have to pay first, before the insurance company pays their share. For example, if you have a $500 deductible on your homeowner’s policy and a storm causes $3,000 in damage, you will pay $500 and your insurance company will pay $2,500. With some policies, you can choose your deductible. Usually, a higher deductible means a lower insurance premium. TIP A good rule to live by is to try to have an emergency savings fund to cover the cost of a deductible should an accident occur.
What are common types of insurance? There are many types of insurance, but some common types are described here. § Health insurance: Helps you pay for doctor fees and sometimes prescription drugs. Once you buy health insurance coverage, you and your health insurer each agree to pay a part of your medical expenses — usually a certain dollar amount or percentage of the expenses. § Life insurance: Pays a person you select a set amount of money if or when you die. The money from your life insurance policy can help your family pay bills and cover living expenses. § Disability insurance: Protects individuals and their families from financial hardship when illness or injury prevents them from earning a living. Many employers offer some form of disability coverage to employees, or you can buy an individual disability insurance policy. § Auto insurance: Protects you from paying the full cost for vehicle repairs and medical expenses due to a collision. In most states, the law requires you to have auto insurance when operating a motor vehicle.
BUILDING BLOCKS STUDENT HANDOUT 3 of 3 What is insurance?
§ Homeowner’s or renter’s insurance: Protects your home and personal property against damage or loss and insure you in case someone gets hurt while on your property. If you have a mortgage on your property, most lenders require you to have homeowner’s insurance as a condition of the loan. What should you consider when buying an insurance policy? A useful rule to live by is to do your homework before you buy insurance. Research any insurance company you’re thinking about buying from to be sure that the company is financially sound and provides good service. Also find out what factors matter so that you can get the coverage you need at the best price.
Benefit: consumer and business confidence Insurance provides individuals and companies with the confidence to go about their daily life and business and to enter into transactions with others. They can be secure in the knowledge that the company they are doing business with will be able to continue to operate and will be able to meet its obligations. For example, holidaymakers gain comfort and confidence from booking with a hotel that has insurance which would refund their deposit should a significant event, such as a fire, close the hotel.
Benefit: control of risks and promotion of safe practices Society in general benefits from a competitive insurance market that can use sophisticated risk pricing to encourage better risk management practices.
The prospect of lower premiums can change behaviour, encouraging individuals and businesses to reduce their risks where they can by altering their behaviour or taking preventative measures. Examples include individuals giving up smoking to reduce their life insurance premiums or fitting smoke alarms to reduce their household insurance costs, and businesses implementing more effective risk management systems to reduce their liability premiums. Another common example is the promotion of safer driving through no-claims discounts on motor premiums.
Benefit: long-term investment in the economy Insurers invest the premium income they receive, making them among the largest institutional investors. For life insurance companies in particular, the products they write are long-term in nature, and so correspondingly long-term investments are made and held to maturity. This steady flow of long-term capital provided to the financial markets by the insurance industry is crucial for the financial system as
a whole, as it reduces market volatility and thus contributes considerably to the stability and functioning of markets.
Benefit: stable and sustainable savings and pension provision
Insurers are significant providers of savings and pension products. The products they
provide are fundamental to old age financial security, particularly in light of ageing populations.
As well as using their experience and sophisticated models to ensure a fair premium is charged, insurers are able to combine different risks. This reduces the likelihood of claims being significantly different from what was assumed in the underwriting and in turn reduces the costs of offering the products.
For example, taking on both the longevity risks inherent in pension products and the mortality risk from life assurance products reduces the financial impact of changes in life expectancy (increases in life expectancy will increase the costs to the insurance company for pensions products, as they will need to pay out for longer, but have an offsetting benefit for the insurance company on life assurance products).