Insurance
Meaning;
Insurance is a contract between you and an insurance company to help protect you and your loved ones from financial loss due to an unexpected event, like an accident, illness, natural disaster, or other unexpected circumstances. In the case of medical, dental or vision insurance, it can also help keep you or your family healthy by offsetting and sometimes covering the cost of routine care.
The insurance contract itself is called a policy. The policy outlines who or what will be covered under the contract, the circumstances for which payment will be issued by the insurance company, who will receive the payment, and how much they will receive.
The most difficult thing about insurance is that you’re paying for something you hope you never have to use. Nobody wants something bad to happen to them. But suffering a loss without insurance can put you in a difficult financial situation.
People get insurance not only to help with risks from unexpected events but also to help pay for routine things, such as annual medical checkups and dental visits. In addition, insurance companies negotiate discounts with health care providers, so their customers pay those discounted rates.
From the standpoint of the insurer, an insurable risk must meet the following requirements:
1. The objects to be insured must be numerous enough and homogeneous enough to allow a reasonably close calculation of the probable frequency and severity of losses.
2. The insured objects must not be subject to simultaneous destruction. For example, if all the buildings insured by one insurer are in an area subject to flood, and a flood occurs, the loss to the insurance underwriter may be catastrophic.
3. The possible loss must be accidental in nature, and beyond the control of the insured. If the insured could cause the loss, the element of randomness and predictability would be destroyed.
4. There must be some way to determine whether a loss has occurred and how great that loss is. This is why insurance contracts specify very definitely what events must take place, what constitutes loss, and how it is to be measured.
How Insurance Works
Many insurance policy types are available, and virtually any individual or business can find an insurance company willing to insure them for a price. Common personal insurance policy types are auto, health, homeowners, and life insurance. Most individuals in the United States have at least one of these types of insurance, and car insurance is required by state law.
Businesses obtain insurance policies for field-specific risks, For example, a fast-food restaurant's policy may cover an employee's injuries from cooking with a deep fryer. Medical malpractice insurance covers injury- or death-related liability claims resulting from the health care provider's negligence or malpractice. A company may use an insurance broker of record to help them manage the policies of its employees. Businesses may be required by state law to buy specific insurance coverages.
Kinds of insurance
Property insurance
Two main types of contracts—homeowner’s and commercial—have been developed to insure against loss from accidental destruction of property. These contracts (or forms) typically are divided into three or four parts: insuring agreements, identification of covered property, conditions and stipulations, and exclusions.
Homeowner’s insurance
Homeowner’s insurance covers individual, or nonbusiness, property. Introduced in 1958, it gradually replaced the older method of insuring individual property under the “standard fire policy.”
Perils insured
In homeowner’s policies, of which there are several types, coverage can be “all risk” or “named peril.” All-risk policies offer insurance on any peril except those later excluded in the policy. The advantage of these contracts is that if property is destroyed by a peril not specifically excluded the insurance is good. In named peril policies, no coverage is provided unless the property is damaged by a peril specifically listed in the contract
In addition to protection against the loss from destruction of an owner’s property by perils such as fire, lightning, theft explosion, and windstorm, homeowner’s policies typically insure against other types of risks faced by a homeowner such as legal liability to others for injuries, medical payments to others, and additional expenses incurred when the insured owner is required to vacate the premises after an insured peril occurs. Thus the homeowner’s policy is multi-peril in nature, covering a wide variety of risks formerly written under separate contracts.
Property covered
Homeowner’s forms are written to cover damage to or loss of not only an owner’s dwelling but also structures (such as garages and fences), trees and shrubs, personal property (excluding certain listed items), property away from the premises (such as boats), money and securities (subject to dollar limits), and losses due to forgery. They also cover removal of debris following a loss, expenditures to protect property from further loss, and loss of property removed from the premises for safety once an insured peril has occurred.
Limitations on amount recoverable
Recovery under homeowner’s forms is limited to loss due directly to the occurrence of an insured peril. Losses caused by some intervening source not insured by the policy are not covered. For example, if a flood or a landslide, which usually are excluded perils, severely damages a house that subsequently is destroyed by fire, the homeowner’s recovery from the fire is limited to the value of the house already damaged by the flood or landslide.
Types of contracts
The major types of life insurance contracts are term, whole life, and universal life, but innumerable combinations of these basic types are sold. Term insurance contracts, issued for specified periods of years, are the simplest. Protection under these contracts expires at the end of the stated period, with no cash value remaining. Whole life contracts, on the other hand, run for the whole of the insured’s life and gradually accumulate a cash value. The cash value, which is less than the face value of the policy, is paid to the policyholder when the contract matures or is surrendered. Universal life contracts, a relatively new form of coverage introduced in the United states in 1979, have become a major class of life insurance. They allow the owner to decide the timing and size of the premium and amount of death benefits of the policy. In this contract, the insurer makes a charge each month for general expenses and mortality costs and credits the amount of interest earned to the policyholder. There are two general types of universal life contracts, type A and type B. In type-A policies the death benefit is a set amount, while in type-B policies the death benefit is a set amount plus whatever cash value has been built up in the policy.
How do you buy insurance?
There are two ways to approach buying insurance, “either directly through an insurer or through independent agents or commercial brokers”. Some insurance companies use captive agents, also known as exclusive agents, who solely represent their company. Other insurance providers use independent agents. These agents represent multiple insurance companies at one time.
If you work with a captive agent:
- Your agent can offer detailed knowledge of the insurance products they sell from their carrier. They likely know the products inside and out and can answer questions about “what if” scenarios.
- Your agent can make recommendations for insurance products based on your insurance coverage and budget goals.
- You will not be able to stick with your agent if you switch to a new insurance provider.
- You may receive personalized customer service in the event you need assistance or file a claim.
If you work with an independent agent:
- Your agent can offer detailed knowledge of different insurance products from multiple carriers.
- Your agent can make recommendations for the best insurance policies based on your insurance coverage and budget goals. To get the most out of your insurance, this may look like choosing one carrier for auto coverage and another for home insurance.
- You may be able to stay with your agent if you switch from one insurance product that they sell to another.
- Your agent, who often owns their agency, may feel more inclined to personalize your customer service as they are motivated to keep your business.