Insurance
The basics of insurance
What is insurance?
Insurance is a financial product that includes a contract between an entity and the insurance company , in which the insured receives financial protection against specified risks. If the specified event occurs, the insurance company agrees to compensate the entity, according to the terms of the insurance policy.
Simply, insurance is there to safeguard an entity or its assets, from damage, loss or other specified events. However, insurance can also cover costs associated with harm to a third party, such as death, damage or injury.
To make the payments more affordable, the insurance company normally uses cross-liability coverage, where an insurance company can cover multiple parties.
In the UK, some types of insurances are legally required. These include a minimum of Third party insurance for drivers and employers liability insurance for businesses.
How does insurance work?
The process of how insurance works follows a rather simple process:
- The entity selects a policy, of which they will be required to pay an agreed premium to the insurance company on that specific choice. The premium may be paid in intervals, or as a one-off payment with the price depending on the risk and the value of the asset or person being insured. This means that insurance for first time drivers, premiums are likely to be high. Conversely, experienced drivers with no accidents or motoring offences recorded, are more likely to receive lower premium costs.
- Then, if the event occurs that is insured occurs, the entity is eligible to make a claim. The insurance company will then see if the event that has occurred would be covered, and then the insurance is payed out to cover it.
Insurance Terminology
1.The Insurer
The financial institution that receives premiums and covers claims according to the terms of the policy.
2.The Insured
The entity that is covered by the insurance policy.
3.Premium
An insurance policy's premium is essentially the cost to have the policy. Typically, the insured can choose how they want to pay their insurance premium, whether that be monthly, quarterly or annually etc.
The cost of the premium takes other variables into account, deciding the risk of the insurance policy. Examples of insurance premiums and the factors they take into account include:
- Health Insurance: Age, sex, location and health history.
- Life Insurance: Age, sex, location and health history.
- Auto Insurance: Age, location, motor offence history and the of the vehicle.
- Home Insurance: Value of home including personal belongings and location.
However, it is important to note that different institutions may charge different premiums for similar insurance policies due to prior experiences or what the company perceives to be risky. This means that it may require some shoe leather costs to find the best insurance deal for the insured.
4.Deductibles
The deductible is the set amount of money that the insured pays before the insurer compensates the claim. Simply, it is the portion of the cost you agree to cover before your insurance kicks in to cover the rest of the expenses, so it is seen as a threshold before someone can be fully insured. Therefore, the deductible disincentivises the insured to use the insurance companies for minor claims, as it may cost more money overall, or reduce the effectiveness of future claims. Policies that have high deductibles are usually less expensive for the insurer, because the high threshold results in fewer smaller claims.
5.Excess
The excess is the amount the insured has agreed to pay towards a claim. In other words, this is what the insured would be required to pay if a claim was made, before the insurance company steps in and covers the rest.
6.Policy
An insurance policy is a legal contract between the insured and the insurer that outlines the terms and conditions of the insurance. This may include specific events or consequences that are covered, the premium value and exclusions that could apply. Insurance policies may vary, with its dependence relying on the types of insurance and the negotiated terms between the insurer and the insured.
7.Policy Limit
The policy limit represents the maximum amount an insurer is willing to pay under a policy. They can be set per time periods, per loss or claim, or over the whole contract (the lifetime maximum). Usually, higher limits carry higher premiums due to the increased potential cost for the insurer.
8.Policyholder
The policyholder simply pertains to the individual or entity that holds the insurance policy. For example, if an entity were to take out health insurance, that entity would become a "policyholder".
9.Coverage
Cash value
Death benefit
Claim
Beneficiary
Exclusions
Risk
Term
Endorsement
Types of Insurance
Auto Insurance
Health Insurance
Home Insurance
Life Insurance
Travel Insurance
Is Insurance an Asset?
The Insurance Sector
Types of Insurance Companies
Mutual vs Stock Insurance Companies
Pros and Cons of Investing in Insurance Companies
Insurance Sector Regulation