Definition

Insurance is a contractual agreement between an individual or entity (the insured) and an insurance company (the insurer), that offers financial protection or compensation to insured in specified cases of loss or damages under the insurance policy.

Types of Insurance

1. Auto Insurance: Auto Insurance is a protection for your vehicles, offering  you coverage from financial losses that could result from accidents, theft or damage. There are key component of auto insurance which we will discuss:

• Liability Coverage: Liability insurance coverage provides protection against claims which comes from your damages to other people’s properties. “Oops my bad” protection.

• Collision Coverage: Collision insurance coverage provides covers for damages to insured vehicles whenever there is collision.

• Comprehensive Coverage: Comprehensive coverage insurance offers you (insured) protection from non-collision events like thefts, vandalism or natural disasters.

• Uninsured/Underinsured Motorist Coverage: Uninsured/Underinsured Motorist Coverage provides you, the insured coverage if the driver at fault has insufficient insurance to cover the damages incurred on you.  

2. Health Insurance: Health Insurance offers financial protection for medical expenses incurred due to illness, injury or preventive care. Type of health insurance includes:

• Health Maintenance Organization (HMO) Plans: HMO requires the insured using a network of doctors and hospitals for medical services.

• Preferred Provider Organization (PPO) Plans: This brings more flexibility in choosing healthcare providers, however with higher out of pocket costs.

• High-Deductible Health Plans (HDHPs): High-Deductible Health Plans features lower premiums and higher deductibles, this is always paired with Health Savings Accounts (HSAs) for tax benefits.

3. Home Insurance: Home insurance offers coverage for homeowners against financial losses arising from damages to their property or liability claims. This typically includes:

• Dwelling Coverage: Dwelling coverage can pay the price to rebuild the construction of your house and any connected systems corresponding to storage or decks.

• Personal Property Coverage: Personal property damage pays to replace the contents of your home, like furniture and clothes.

• Liability Coverage: This coverage is for damages or injuries you are legally liable for guest slip and fall on your property.

• Additional Living Expenses Coverage: Additional living expenses covers for temporary living expenses if the home is uninhabitable due to a covered loss.

4. Life Insurance:

If you pass away, having life insurance secures your loved ones financially. Shall generally comprise of two basic types,

• Term Life Insurance: Provides protection for a certain period of time, typically 10–30 years. This means if you die during this time period, then your loved ones get a death benefit.

• Permanent Life Insurance: Permanent Life Insurance covers the entire life and a money value component that grows over time. Types of permanent life insurance are whole life, universal life and valuable life insurance.

• Whole Life Insurance: Whole life insurance offers coverage for the insured’s whole life time and includes a money value that accumulates over time.

• Universal Life Insurance: Universal Life Insurance offers flexibility in premium payments and death benefits with potential for money value growth.

• Variable Life Insurance: Variable Life Insurance is the coverage that gives the insured freedom to allocate premiums to a specific investment choice for potential growth, but with investment risk.

5. Disability Insurance: Disability insurance is an income replacement insurance which covers for insured when unable to work due to disability or illness. It typically can be:

• Short-Term Disability Insurance: Short-term disability  insurance offers insured benefits for a limited period of time, usually up to six months after a waiting period.

• Long-Term Disability Insurance: Long-term disability insurance offers insured benefits for an extended period, potentially until retirement age, after a waiting period.

• Social Security Disability Insurance (SSDI): Social Security Disability Insurance offers coverage to individuals who are unable to work due to a certain disability lasting at one year.

How does Insurance Work

Insurance works on risk transfer. An individual or entities (the insured) pool resources, paying for premiums to an insurance company (insurer) which then determines the financial risk of potential losses or damages.

In exchange for this, the insurer agrees to offer compensation or coverage for a specific events covered under the insurance policy.  

This transfer of risk helps protect policyholders from facing the full financial expenses of an unexpected events, thereby promoting financial stability.

Key Components of Insurance

1. Premium:  

Premiums is the amount you pay to an insurance company for a coverage. The payment could be monthly, annually or quarterly, it differs with each insurance companies but this payment ensures there’s an insurance contract between you(the insured) and the insurance company (the insurer). The insurance companies will determine premiums with the level of coverage and your risk history, so it could be higher or lower based on these factors.

2. Policy:

Insurance policy is the legal contract that binds you and the insurance companies. This document will always show the terms, conditions, coverage and limits of the insurance. Also, it could include exclusions of events where the insurance companies cannot cover. This is the master document offering clarity of responsibilities and obligations of both parties.

3. Coverage:

Every insurance has a scope of protection and if it goes beyond the scope, the individual or entity cannot be provided for or protected. This makes it clear that every insurance coverage has it limitations and areas covered, this is always seen in the document. Different types of insurance policies covers different types and levels of coverage to address specific needs and risks.

4. Deductible:

In insurance the insured must cover from his/her pocket certain damages before the insurance companies steps in. Deductible is an amount an insured agrees to cover for and not call for claims in any event of damages. This is an amount too low and can be seen as insignificant claims. Whenever an insured does this, it lowers the premium costs, however, if the insured doesn’t cover this minimal damages, it increases premiums cost.

5. Claim:

Claim is a formal request by the insured to the insurance company for reimbursement or compensation for covered loss or damages. Insurance companies evaluates all claims in line with the terms, conditions and policy of the coverage, thereby approving or denying the claim.

How Insurance Works in Practice

To understand how insurance works, let’s use auto insurance as an example. If you are to purchase an auto insurance policy, protecting your vehicle against damages and liabilities, paying a monthly premium to an insurance company, It will pool your premium along with premiums from other policyholders. In an event of accident, you can file a claim with your insurance company to seek compensation for the damages to your vehicles.

The insurance company then evaluates your claim, verifies coverage and determines if they should pay for the repair or replacement of your vehicle, minus any applicable deductible.

Benefits of Insurance

1. Financial Protection: This gives the policyholder financial protection against such unanticipated situations and assists him/her in recovering from disasters.

2. Provides Peace of Mind: Insurance stays because of it ability in giving peace of mind. Insurance takes the burden of your shoulder and you would gain peace of mind knowing you are always covered by them.

3. Allaying the Uncertainty: Insurance exist primarily for the purpose of dealing with unexpected events which naturally would cost a lot to cover at the moment. With Insurance you are sure all uncertainties can be taken care of. Whether it’s an individual or business, with insurance uncertainties has nothing on you.

4. Insurance Regulation: Individuals or businesses must adhere to the insurance policy regulations and not trying to reap off the insurance companies or stating lies while registering.

Principles of Insurance

1. Principle of utmost good faith:

Insurance contracts are on the principle of good faith as the insured and insurer act honestly to disclose all relevant information related to the insurance. This shows need for mutual trust and transparency in insurance agreements.

2. Principle of Indemnity: The principle of indemnity states that insurance aims to compensate the insured for the financial loss suffered, not to provide profit. These policies are to restore the insured to the same financial position they were before the losses occurred, not overcompensating or undercompensating.

3. Principle of Insurable Interest: Insurable interest refers to legal and financial stake that the insured has in the insurance policy. While purchasing insurance, the insured must take self-cautious actions to prevent potential losses or damage of insured property or person.

4. Principle of Subrogation: Subrogation is the legal principle which allows insurance companies to pursue legal rights or remedies for the insured  against third parties responsible for causing the covered loss. This principle help prevents the insured from double recovery, allowing the insurer to recover costs paid out in claims.