Ensuring financial security for your well-being is not an instant decision or solution. It is a process! There are different ways to get it done for your benefit. And the most predominant and effective means to achieve it is Insurance. So, what does it mean? How does it work, and what are the principles of a life insurance policy?
Let us get onto the details right away.
What is Insurance?
Insurance is a legal contract between two parties, the insurance company called the insurer, and the individual named the insured. The individual will get financial protection for any damage caused to their life or property. The insurer will ascertain the individual that they will provide financial assistance for loss due to uncertain events. The insured will pay a premium for the risk coverage accommodated and the promise made by the insurer.
Types of Insurance
There are two main types of insurance, life insurance and general insurance.
- Life Insurance - Life insurance is a contract between the insurer and the insured wherein the insurer will provide a lump sum death benefit to the insured individual's nominee in case of the unexpected demise of the insured during the policy term.
There are different types of life cover policies, such as term insurance, whole life insurance, etc. In addition, insurers have also introduced comprehensive insurance plans to include a life cover with savings or investment benefits. Some of the most common comprehensive insurance plans are the ULIP Insurance Plan, etc. Insurers offer online life insurance to let the policy seekers understand, analyse and buy the right insurance plan from the comfort of being at their place.
- General Insurance - General insurance is an agreement between the insurer and the insured for the loss or damage caused to any assets. It can cover the cost related to any aspect other than the insured's death.
The different types of general insurance are health insurance that covers the cost related to medical expenses, motor insurance that covers the cost related to repairs in case of an accident or other damages, travel insurance that covers the cost in case of any loss during travel to domestic or international destinations, etc.
What is the Basic Insurance Mechanism?
Every insurance plan will have three main components:
- Premium - It is the cost to purchase the insurance plan. The insured can pay the premium monthly, annually or semi-annually based on the policy terms. In the case of certain general insurance plans, such as motor insurance, the insured has to accept deductibles that refer to a certain part of the cost required for the repair in case of damage to the property.
- Policy term - It is the duration of the insurance plan. It defines the period for which the insurer will cover the risk for the insured.
- Payout - It is the benefit of the insurance policy. In life insurance, it can be the death benefit to the nominee or the maturity benefit in the case of comprehensive life insurance plans. And in general insurance, it is the fund provided by the insurer to cover the cost related to the loss or damage to an asset.
In addition to these components, there can also be add-on rider# benefits that enhance the benefits from the insurance plan.
So, the basic mechanism behind an insurance plan is that the insured person will pay a premium regularly for the policy term, and the insurer will accommodate the risk and provide financial assistance to manage and get over uncertain events.
The contract between the insurer and the insured person is based on certain guiding principles. Here is a detail about it.
Fundamental Principles Of Life Insurance
To enable the proper functioning of the insurance contract, the two parties have to uphold certain important life insurance principles.
- Principle of good faith - Both the parties involved in the contract should act in good faith. The insured person should provide clear and correct information regarding a loss, and the insurer should provide the right compensation based on the terms and conditions of the plan.
- Principle of proximate cause - In the case of multiple causes of the damage to a property, the insurer will find the nearest cause and act accordingly
- Principle of insurable interest - It states that the property for which the insured gets into the contract should provide financial gain to the insured, and any damage to it leads to financial losses.
- Principle of indemnity - It states that the purpose and intention of the insured to get into the contract is to get compensated for the loss and not make any financial gain.
- Principle of contribution - It is based on the same concept as the principle of indemnity. When the insured gets multiple insurance plans for the same reason cannot decide to benefit from the payouts of all the policies.
- Principle of loss minimisation - It states that the insured should not be careless or irresponsible concerning the insured property just because it is insured.
Insurance is a financial instrument to secure the life and assets of individuals. Insurers get into a legal contract to compensate for the losses incurred on a property or life of the insured. To ascertain the benefit, the insured will pay a premium regularly. Several guiding principles govern the functioning of the contract. It is the responsibility of the insurer and the insured to abide by these principles and uphold the financial benefit for the right intentions.