What Is Insurance?



Life is filled with uncertainty and, despite what positive thinkers might say, things do happen to people, sometimes including you. When unexpected things happen, there is the potential for financial losses. You could absorb all of the losses (assuming you have all the financial resources to do so) or you could transfer the risk to someone else. Insurance is all about designating who will absorb the risk of losses or damage.

Purchasing insurance from an insurer is the medium by which you transfer the risk of loss or damage to another entity, that is, the insurance company. The insurance company will write a policy that undertakes to cover you for the financial loss that may issue from unexpected occurrences, in turn for your payment of a certain fee, or a premium. Once you have agreed to the terms and conditions of cover, the insurer will write their name under, or underwrite, the policy, and you will be officially insured.

Type of insurance: There are two basic types of insurance. Short-term insurance provides cover for the things you own: your home, its contents, a motor vehicle, or some other possession of value. Long-term insurance refers to life cover. Insurance Cover You will have to agree with the insurance company the amount of cover for the items you want insured. The insurer calculates the premium based on a statistical assessment of the likelihood, or risk, that the event for which you're buying insurance will actually occur, e.g. of your car getting stolen. The policy is usually written for a year, so you must pay premiums at least annually. Monthly payments are allowed, but annual payments could get you a discount.

The insurance policy does not cover a certain portion of every claim, thus you shoulder the burden of payment for that. Your share is also called the first amount payable. Standard excess is a basic and mandatory provision in any short-term insurance policy. Sometimes, there may be need for an additional excess. For instance, a car insurance policy might impose an additional excess for drivers under the age of 21 years. Both standard and additional excess are compulsory excesses. A voluntary excess comes into play when you express willingness to increase your share beyond the compulsory, because doing so will help to lower the amount of premium. The excess structures for motor vehicle insurance are rather complicated so make sure you study the fine print very carefully. If you wish to avoid paying the excess, you can get a waiver, i.e. you get insurance for the standard excess amount; however, this requires payment of an additional premium and makes your cost of insurance more expensive.

Terms, conditions, exclusions: It is said the devil is in the details, and the fine print on your insurance policy is one such thing. It is important for you to know exactly what your policy excludes. Your home insurance policy may cover cost of damage on a burst geyser but not related damage on your carpet. Exclusions help to lower your premiums, but if you want cover for excluded items you will have to pay more. Terms and conditions govern the provision of cover and you will have to fulfil these provisions if you expect reimbursements in the amounts agreed upon. For instance, your car may not be eligible for protection against theft unless you install a tracking device. Or the household policy may specify that your house must have burglar alarms in place to qualify for protection against theft. Determining and providing for your insurance needs is a critical element of financial planning. This is protecting your financial resources from being drained in case uncertainties become realities in your life. Remember, fires, accidents and thefts happen every day, and sometimes not always to other people.