An insurance is a legal agreement between an insurer (insurance company) and an insured (individual), in which an insured receives financial protection from an insurer for the losses he may suffer under specific circumstances.
Under an insurance policy, the insured needs to pay regular amount of premiums to the insurer. The insurer pays a predetermined sum assured to the insured if an unfortunate event occurs, such as death of the life insured, or damage to the insured or his property.
Learn more about Insurance Plans
Insurance - Meaning and Definition
The literal meaning of insurance would be an assurance against unforeseen and unfortunate loss. This means, that if you encounter a less than normal event in your normal course of life, and happen to incur a financial loss because of it, you can be compensated.
For example, you met with an accident on your way to the office in your car and the car suffers damage. Your insurer can reimburse the repair expenses in this case. However, the insurer will not reimburse normal wear and tear like a headlamp stopped working.
Legally insurance has been defined as a contract where the insurer agrees to compensate the insured against the losses incurred due to any unforeseen contingency. The contract also involves a consideration which is called a premium. The maximum available benefit amount is called sum assured or sum insured.
How does an Insurance Policy Work?
To understand how insurance works, you should know below terms:
Premium:
is the money you pay to the insurance company to avail of insurance policy benefits.Sum Insured:
Sum insured is applicable for a non-life insurance policy like home and health insurance. It refers to the maximum cap on the costs you are covered for in a year against any unfortunate event.Sum Assured:
Sum assured is the amount the life insurance company pays to the nominee if the insured event happens (death of insured).
As discussed above, insurance is a legal contract between the insurer and the insured. The insurance policy lists all the policy's conditions and circumstances under which the insurance company is liable to pay you or the nominee the insurance amount.
When you buy an insurance policy from the insurance company, you will have to make regular payments (premium) for a specified period towards the insurance policy.
The insurance company collects the premium from all the clients. They pool the money for losses that may arise out of an insured event. If you don't claim during the policy tenure, you may or may not receive any benefits. It depends on the policy type and the conditions.
Also Read - Different types of insurance policies
Insurance Components
An insurance policy is made of multiple components. Some of the important parts of an insurance contract are:
Premium:
This is the financial consideration which makes the insurance agreement a legally binding contract.Policy Limit:
Policy limit applies to health and general insurance policies where compensation depends on the amount of loss. The policy may limit the maximum compensation for certain types of losses.Deductible:
Deductible applies to general insurance and health insurance policies. A deductible is the maximum amount of loss you will bear out of your pocket. The insurer will start paying only when your losses (or expenses) rise above the deductible limit.
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