About Insurance.

About Insurance - Money Matters.

This post is about insurance. Insurance is not a new concept; it is an old one. In fact, it is an ancient one. People have faced hardships, poverty, diseases and destruction from time immemorial, but have also found ways to deal with such unfortunate events. People in ancient times knew the importance of conserving material wealth. They used to protect their valuable goods by making arrangements in their home. They used to save for future. The fruits of human endeavor which we are enjoying now has its source in history. Insurance is one of them.

Insurance Contract.

Insurance is a contract between the insurer and the insured. It is a contractual agreement where the insurer agrees to provide financial protection against risks faced by the insured for a price. In insurance, this price is called the premium. The insurer and the insured has to disclose all material facts to each other in utmost good faith (Uberrima fides) for sustaining the contract.

Uberrima fides is a Latin term which means 'Utmost good faith'. This term is used to emphasise the importance of truthfulness and clarity when it comes to disclosures in a contract agreement.

Importance of Insurance.

Insurance has proved to be a lifesaver for many people. Insurance sometimes works like a lifesaving medicine. Just as lifesaving medicines save life; insurance helps to save life.

Insurance helps individuals to rebuild their lives when a tragedy befalls on them. The role of insurance is to provide financial assistance to individuals when the risk becomes a reality. By buying insurance, a person transfers his risk to the insurance company.

Insurance could be classified into two main categories; those dealing with life and those dealing with assets. Insurance which deals with life are called life insurance and those that deal with assets are called general insurance.

Life Insurance.

Life insurance are contracts of assurance. The insurance company assures its customers that they will receive money as specified and agreed by both of them (insurer and policyholder) as per the terms and conditions of the contract. Usually, this happens when the policy matures or when some unfortunate eventuality takes place. The moment a person buys a life insurance policy, his risk gets covered as per the features of the policy.

Human Life Value.

Life is most valuable. As all valuable things are considered assets, life is the supreme asset. Nobody can determine the value of life because it is priceless. Yet there is a method which tries to assess the value of human life by considering some parameters and calculating them. This method is called the human life value (HLV) and it was developed by Professor Hubener. This method is often used in life insurance to decide about suitable plans for prospects.

Life Insurance Plans.

Life insurance products could be term plans, whole life insurance plans, endowment plans or unit linked insurance plans. Term plans, whole life plans and endowment plans are the traditional life insurance products.

(1) Term plans: Term plans covers the risk of untimely death. It is meant for securing the financial condition of the family in case the breadwinner passes away. Term plans don't have any maturity benefits.

(2) Whole life insurance plans: As the term suggests, whole life plans provide cover for entire life.

(3) Endowment plans: Endowment plans have features of a term plan and also a pure endowment plan. Endowment means a gift and these plans function like a gift. They are suitable for them who want to save money for future. These gift plans have variants which make it attractive. These variants are:

• Money back plans: In money back plans we receive money at regular intervals which we can use for our needs or save further.
• At par or participating plans and non-par plans: Par plans or at par plans are participating ones. These plans participate in insurers business. Non-par plans do not participate in insurer's business and these plans are usually the guaranteed ones with reasonable returns.
• Par with profit plans: Par with profit plans participate directly in insurer's business and also share profits.

(4) Unit Linked Insurance Plans (ULIP): These plans are investment plans which are linked to market and so are potentially good for high returns, but are also risky. In ULIP, risk is borne by the insured.

Riders in Life Insurance.

A rider is a special provision in life insurance with which some additional risks can be covered by paying the rider premium. Riders increase the value of a policy by covering additional risks like accidents or critical illness. Riders are added at the time of purchasing the policy, e.g. critical illness rider can be purchased with an endowment policy.

Riders are not mandatory, but since they cover some specific risks like accidents, they are recommended by insurance companies. Riders aren't costly either, which is why adding it to a policy doesn't make premium too expensive.

General Insurance.

General insurance are contracts of indemnity. By indemnity, we mean that money will be paid only for the actual loss or damage caused to an asset or property and not for the entire asset. If an asset is damaged, the money will be paid only for repairing it and not for buying a new one. General insurance is also called non-life insurance because it primarily deals with properties and assets.

General insurance includes motor vehicle insurance and insurance for property which could be home insurance or insurance for shops, factories and other establishments. Marine insurance, travel insurance and even health insurance come under general insurance.

Motor Vehicle Insurance.

Motor vehicle insurance covers the risk of accidental damage. It is an indemnity contract between the general insurance company and the owner of the vehicle. The insurance company pays the repair bill which may include the cost of parts and labour charges. Insurance company calculates depreciation based on which some amount has to be borne by the insured.

Home Insurance.

Home insurance covers the risks of damage to home and usually involves the physical structure and may also include its contents. Based on cover, home insurance are of two types.

1. Home insurance which covers risks of damage to building or the structure.
2. Home insurance that covers risks of damage to the contents of home.

Home insurance covers damage or loss caused due to following mishaps:

• Damage caused due to fire or lightning.
• Cyclones and flash floods.
• Earthquakes and landslides.
• Damage or loss due to theft or burglary.

Health Insurance.

Health insurance covers the risk of serious illnesses. It covers hospitalisation cost which is usually beyond the capacity of common man. Most health insurance cover pre and post hospitalisation expenses along with in-patient hospitalisation. Health insurance products could be of three types:

1. Indemnity covers: In health insurance with indemnity covers, only the actual medical expenses incurred due to hospitalisation are covered.
2. Fixed benefit covers: In fixed benefit covers, the insurance company pays a fixed amount per day for the period of hospitalisation.
3. Critical illness covers: In critical illness covers, the insurance company pays a fixed amount for major diseases like heart attack, cancer or any specified diseases.

Travel Insurance.

Travel insurance covers the risk in traveling. It includes medical and non-medical emergencies which makes it useful for a person going abroad. Travel insurance covers the following risks:

• Accidents of all kinds.
• Sickness which requires hospitalization.
• Loss of travel documents.
• Accidental death during travel.

Marine Insurance.

Marine insurance covers risks in transportation of tangible goods. It covers risks in transit of cargo. Cargo can be transported through water (river, sea, ocean), through air, railway, by road and by post or courier. Marine insurance is useful for them who are in the business of transportation of goods.

Financial Benefits of Insurance.

Insurance provides help and support for an individual or a family reeling under loss like no one does. A loss can never be replaced if it is a loss of life. However, money and property, if lost, could be recovered. Insurance helps mitigate financial loss of any kind if that risk is covered by it.

The following points highlight the financial benefits of insurance in general.

(1) Insurance covers risks: The major role of insurance is to compensate for the financial aspect of loss by covering risks. This would mean, paying money to the insured as per the agreed terms, when there is a claim. Insurance does this effectively.

(2) Need based insurance is beneficial: When crisis emerges out of the blue, the income gets affected. When people don't have alternate source of income to rely on, their situation become miserable. People can avoid such situations by taking need based insurance.

(3) Insurance helps to save: Insurance helps people build savings. Life insurance offers many plans for savings with guaranteed returns. People with less income too can purchase an endowment policy and build reasonable savings for themselves and their families.

(4) Insurance is good for investments: Life insurance is good for investments as there are so many plans that give reasonable returns for lifetime. People can choose plans as per their requirements and can invest in them. When people pay high premiums, it becomes an investment rather than savings.

(5) Loan from policies: Life insurance policies also have loan facilities, which could be availed to meet cash needs. Around 70% to 80% of the premiums paid could be taken as a loan. A policyholder could get a loan if he has paid premiums for some consecutive years.

(6) Risk to properties are covered by general insurance: General insurance helps insured in a big way when a damage or loss takes place. A lot of money is often required to repair damaged assets. If the property is damaged beyond repair or if it is lost, then the owner might have to spend lot more money to have it back. This is where, a general insurance cover is helpful.

Shortcomings in Insurance.

Insurance has some shortcomings. They are:

• In life insurance, there is an age limit for buying policy. A person cannot purchase a policy if his or her age exceeds the prescribed maximum limit. Although they can buy policy as a proposer for their children or grandchildren, they cannot get it for themselves even if they want to.

• In life insurance and in health insurance, the premium increases as age advances. Everybody cannot afford to pay high premiums for an insurance cover.

Tips for Investing in Insurance.

The following points may be helpful for an investor in insurance.

(1) Learn about different plans and policies in insurance. People usually don't spend time in reading insurance prospectus either because they are boring or are too lengthy that they cannot waste time on it. The best way to know about a plan is when an insurance agent or an advisor approaches you with a plan. Understand what the plan is all about; its features, the premium and its benefits.

(2) Insurance plans often don't appeal to people in first sight. Its a fact. People reject it most of the time, but when they come to know about it again, that they understand its features and benefits more clearly. So, its always good to update our knowledge about new plans in insurance because insurance indeed has the potential to save us financially.

(3) We should select a policy which fulfills our future needs. We should do our need analysis because it helps us to select an appropriate plan.

(4) Premium should be well within our capacity to pay. We should not select a premium or the frequency of payment which strains us financially.

(5) We should neither sacrifice insurance for all important things nor should we sacrifice other important things for insurance. There should be a balance in our financial activity.

(6) Once we purchase an insurance policy, the premium has to be paid as per schedule. We should select premium paying term (PPT) and frequency or mode of payment by analyzing our capacity to pay.

Insurance is neither a luxury nor a liability. It is a necessity. People who know about insurance will agree with this. People know the importance and significance of insurance today than ever before. When people buy insurance they ensure the well-being of themselves and their families. Insurance provides financial security which is pertinent in an uncertain world.

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The previous post was about investments.

The next post is "Our Budget".

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