What is Insurance: Definition, Benefits, and Types
Insurance is a legal agreement between two parties – the insurer and the insured, also known as insurance coverage or insurance policy. The insurer provides financial coverage for the losses of the insured that s/he may bear under certain circumstances. Let’s discuss in detail what is insurance and how it works, the insurance benefits, and types.
Insurance – Definition and Meaning
Insurance coverage can be defined as a contract in the form of a financial protection policy. This policy covers the monetary risks of an individual due to unpredictable contingencies. The insured is the policyholder whereas the insurer is the insurance-providing company/the insurance carrier/the underwriter. The insurers provide financial coverage or reimbursement in many cases to the policyholder.
The policyholder pays a certain amount called ‘premium’ to the insurance company against which the latter provides insurance cover. The insurer assures that it shall cover the policyholder’s losses subject to certain terms and conditions. Premium payment decides the assured sum for insurance coverage or ‘policy limit’.
What is Deductible? Why Pay Deductible if Premium is Paid?
Sometimes when you make an insurance claim, the premium amount is less than what it should be. So, in that case, you first have to pay the remaining amount and then claim the insurance money. The extra amount to be paid under such circumstances is called ‘deductible’. You can pay lesser premiums and higher deductibles in an agreement with the insurer.
Features of Insurance Coverage
Insurance coverage has the below mentioned salient features:
- It is a kind of risk management plan to use an insurance policy as a hedge against an uncertain loss
- Insurance coverage does not mitigate the magnitude of loss one may face. It only assures that the loss is shared and distributed among multiple people
- Various clients of an insurance company pool in their risks. Hence, they pay the premiums together. So when one or a few incur a financial loss, the claimed money is given out of this accumulated fund. This makes each client bear a nominal fee
- Insurance coverage can be provided for medical expenses, vehicle damage, property loss/damage, etc. depending on the type of insurance
- Premium, policy limit, and deductible are the main components of an insurance coverage policy. The policy buyer should check them thoroughly while buying an insurance policy
Benefits of Insurance Coverage