Insurance is hardly a new concept to the world. Although people have described Insurance variously, a basic definition of the term would have to revolve around risks, losses, and compensation. Ideally, being insured means being covered against certain circumstances, especially those that are unpredictable. Your Personal Financial Mentor therefore defines Insurance as a promise of compensation for future risks in exchange for monthly or yearly payments. The purpose of Insurance is to protect the welfare of the individual, such that in the event of certain losses, they are compensated so that their lives can continue like before. Although Insurance is a matter of choice for the individual or company, there are some forms of Insurance that are compulsory according to the law. One such form is vehicle insurance.
When an individual or company enters into a contract with an Insurer, they agree to specific terms and condition. Every Insurance policy has its unique terms and conditions. It is very important to read the terms of the policy before agreeing because some rogue Insurers can easily trick you into buying an inappropriate policy.
The periodic payments made by the client to the Insurer are usually called insurance premiums. In return, the Insurer agrees to pay a given amount of money in case of certain losses. However, the policy holder also has to pay a small fraction the cost for the losses. This is usually referred to as a deductible, and is common to most forms of insurance.
The core idea behind Insurance is risk. The policy holder risks by paying insurance premiums, knowing that the said loss may not occur at all. If the loss does not occur within the period of cover, then it means that all the payments were in vain. But in case the loss occurs, then the holder will be compensated for the loss regardless of how much he has paid in premiums.
On the other hand, the Insurer too takes a risk by agreeing to pay for the unpredictable loss. This is because the Insurer knows that the loss might indeed occur, and that if it does, then the Insurer will pay a lot more than what he has received from the policy holder in terms of premiums.
Perhaps the reason why Insurance is very important in society today is because of security. Being insured gives you an assurance that your property is protected, and that you can have it replaced in case of any loss or damage.