Insurance Definition, Importance and Types of Insurance

What is Insurance?

Insurance is a contract between two parties, by which one party agrees to pay a certain sum of money to the other party either to make good a loss due to an accident or on expiry of a certain period against a consideration called the premium.

According to the agreement of insurance, the party which agrees to compensate the other party for a loss due to an accident or to pay a certain sum of money after the expiry of a certain period is called Insurer.

On the other hand, the party which is entitled to get a certain sum of money from the insurer on account of compensation or expiry of a definite period is called insured.

The document through which the contract of insurance is performed between the insurer and insured is called is Insurance Policy.

The consideration against which an insurer agrees to pay compensation or to pay a certain sum of money after the expiry of a certain period to the insured is called Insurance Premium.

The amount of compensation for which an insurance policy is taken by an insured is called Policy Value or Insured Value.

Why is insurance so important?

The importance of insurance as it ensures that you are financially secure to face any type of problem in life, and this is why insurance is a very important part of financial planning. A general insurance company offers insurance policies to secure health, travel, motor vehicle, and home. The convenient part of it is that you can purchase all these insurance policies online nowadays.

  • Contract of utmost good faith: An insurance is a contract of utmost good faith. For this, a contract of insurance is performed between the insured and the insurer, both of them remain obliged to disclose all material facts about the subject matter of insurance, otherwise, the validity of the contract is lost and both of them may sustain a loss due to supply of wrong information.
  • Helping in foreign trade: International trade involves many risks in transporting goods from one country to another. The insurance companies help the businessmen to participate in foreign trade through the up-te burden of all these risks.
  • Providing Security: The insurance companies provide security to the insured persons by taking the responsibility of compensating the likely losses.

What are the types of insurance in India?

Insurance may be of different types, which are shown below through the following are:-

  1. Life Insurance
  2. General Insurance
  3. Social Insurance

1.Life Insurance: Life Insurance is such a contract between an insurer and insured whereby the insurer agrees to pay a certain sum of money on the maturity of the policy or on the death of the insured, whichever is earlier, against a lump-sum premium or an installment-based premium, In this case, if the insured survives till the date of maturity of the policy, the insurer directly pays the sum assured to him on the insurer pays the sum assured to the nominees or legal heir of the insured.

2.General Insurance: The contract of insurance under which an insurer agrees to pay compensation for loss or damage of the property of the insured due to an accident, against a fixed amount of premium, is called General Insurance. General Insurance may be of different types; such as-

  1. Fire Insurance: The insurance contract in which the insurer undertakes to pay compensation for the loss of property, stock of goods, or profit of the insured due to fire against the premium paid by the insured, is called Fire Insurance.
  2. Marine Insurance: Marine Insurance is such an insurance contract by which the insurer undertakes to compensate the owner of a ship or cargo for complete or partial loss at sea during the voyage.
  3. Accident Insurance: When a contract of insurance is performed to indemnify for any loss of person or property due to an accident, it is called Accident Insurance.

3.Social Insurance: Social insurance refers to such insurance which is taken on various social matters as a means of public welfare. Social insurance may be of different types:

such as-

  1. Health insurance: The insurance contract by which an insurer undertakes to pay up to a stipulated amount on account of medical expenses for the insured person or his family is called Health Insurance.
  2. Workmen’s Compensation Insurance: The insurance policy which is taken by an employer to pay compensation for the death or injury of his employees due to an accident at the time of doing work in the factory, is called Workmen’s Compensation Insurance.

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