Insurance & Types of Insurance

Life is full of uncertainties - some are preventable or can at least be minimized, some are avoidable and some are completely unforeseeable. People opt for insurance purely for the reasons of uncertainties in life. Insurance gives the insured a kind of peace of mind as he is assured to making up the loss in the event of such uncertainties in life. Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium. Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate.

Insurance works by pooling risk. A large group of people who want to insure against a particular loss pay their premiums into an insurance bucket, or pool. Because the number of insured individuals is so large, insurance companies can use statistical analysis to project what their actual losses will be within the given class. They know that not all insured individuals will suffer losses at the same time or at all. This allows the insurance companies to operate profitably and at the same time pay for claims that may arise. For instance, most people have auto insurance but only a few actually get into an accident. You pay for the probability of the loss and for the protection that you will be paid for losses in the event they occur.

Insurance can be broadly classified as:
A) Life Insurance
B) Non - Life / General Insurance

A) Life insurance provides financial protection to your family in the unfortunate event of your death. At a basic level, it involves paying small sums each year (called premiums) to cover the risk of your untimely demise during the tenure of the policy. In such an event, your family (or the beneficiaries you have named in the policy) will receive a lump sum amount. In case you live till the maturity of the policy, depending on the type of life insurance policy you have opted for, you will receive returns the policy may have earned over the years. Today, there are many variations to this basic theme, and insurance policies cater to a wide variety of needs. Basic types of life insurance policies include term insurance, endowment policy, whole life policy, money back and Unit Linked Insurance Plan (ULIP).

B) Insuring anything other than human life is called Non-Life / General insurance. General Insurance comprises of insurance of property against fire, burglary etc, personal insurance such as Accident and Health Insurance, and liability insurance which covers legal liabilities. There are also other covers such as Errors and Omissions insurance for professionals, credit insurance etc.