Insurance means making functional a loss experienced by one party; the other party pays this financial loss. When an individual or entity is worried about the possibility of a financial loss, it can decide to transfer the risk of that loss to another company on mutually agreeable terms. Both the insurer and the insured sign a contract which contains the amount of damage covered, along with other terms and conditions on which such payment is contingent. This legally binding contract is known as an insurance policy.
The amount agreed upon is payable only if the contingent event happens. The reason an insurer takes up this risk is that this contingent event is uncertain. Unlike a fixed deposit, where the principal, interest rate, and duration of the deposit is fixed, thus making the payment sure, insurance policies payout only if a said event happens. Given that such contingencies are uncertain, and it is not expected that all insured entities will need to be paid out, an insurer can take on these risks. Unlike a fixed deposit, which can be opened at any time by an investor, an insurer takes time to evaluate the proposal by an insured before issuing a policy.
In India, there are broadly two types of insurance – life insurance and general insurance. While auto insurance is mandatory, other types of insurance included in general insurance are health insurance plans, home insurance, fire insurance, burglary insurance, travel insurance etc.
The best life insurance plan depends on an individual’s case. For instance, among various types of life insurance plans in India, two are term insurance and whole life insurance. While term insurance covers the insured until the specified term of the contract, whole life covers an insured throughout his life. However, term insurance is much cheaper than whole life insurance. Similarly, if you intend to make money from your insurance, neither of these plans will suit you. You need to seek endowment plans, money-back policies, or unit-linked insurance plans.
You can engage the services of an investment adviser and use online tools to determine which the best life insurance plan is for you.
The six principles of insurance are as follows:
Utmost Good Faith: Unlike ‘Caveat Emptor’ which asks the buyer to be careful before making a purchase, Utmost Good Faith or ‘Uberrima Fides’ expects the proposer and insurer to act honestly and in full disclosure with each other during contract formation and when the policy is in effect. Neither party should hide or misrepresent facts at any stage failing which they face legal action for defrauding the other.
Insurable Interest: This refers to the relationship between the insured and the subject matter of insurance. The insured must have a financial interest in or own the subject matter of insurance for him to experience a financial loss. E.g., a car owner is the insured, and the subject matter of insurance is the car. If some material damage occurs to the vehicle, the insured will experience a financial loss because he owns the car. The principal intends to prevent a person who does not own the subject matter from making a claim.
Proximate Clause: This refers to the cause, which results in damage to the subject matter of insurance. If there is more than one cause, proximate cause refers to the most dominant clause. This principle outlines an insurer’s liability, specifically in cases where there are multiple causes of damage.
Indemnity: This principle says that the insured should be compensated for the loss experienced to the tune of the coverage of the policy, but he cannot be overcompensated. The policy document will direct whether a claim will be valued at cash or the replacement value. This principle does not apply to life insurance.
Subrogation: This principal helps control insurance costs by placing an insurer as a middleman when a third party has caused damage. This principle not only disallows the insured to make claims from different companies for the same loss, but it also legally empowers the insurer to demand compensation from the third party, which has caused the damage.
Contribution: If the insured party holds more than one policy for the same thing, this principle allows insurers to share the cost of the claim. It also disallows the insured to make the full claim on all his policies for the same thing.
The following are the functions of insurance:
Helps economic progress