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What is insurance and why is it important
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  • Posted by: nicol

 What is insurance and why is it important ?

In our day-to-day lives, we face many uncertainties. For example, we may get involved in a car accident out of nowhere and it might not even be our fault. Or we may suddenly fall sick and may have to visit the hospital because of this. Both of these scenarios are unpredictable and can happen to anyone. They also cost a lot of money and call for some sort of safety measure to be put in place.

Insurance is a safety measure that can protect people from almost all sorts of uncertainty. They provide coverage for people who suffer various damages in exchange for a small fee, called the premium. It is very important as not only does it lessens the risk borne by the insured, it allows people to live, drive and do other work without any added stress.

Let’s take a deeper look at what is insurance and why is it important.

What is insurance?

Insurance is a pact between the insurer and the insured that the insurer will financially protect the insured if the latter suffers any damage. They will provide this service for a small fee. This fee is called a premium, which has to be deposited every month. The premium each person has to deposit varies according to how risky they are.

The term risk means the probability of a person making their claim. For example, if a person goes to buy car insurance, they’ll be deemed as risky if their driving history is bad, their car is in a bad shape, etc. So their premium will be set high. On the other hand, a driver with a decent driving record, and an older car will be deemed safe and their premium will be set lower.

There are a few terms regarding insurance that will help you understand the concept of insurance better. Let’s take a look at them:

1. Premium

The premium is the monthly fee an insurer has to deposit every month so that the insurer covers them in the case of an accident or any damage of any sort. The insurer will take the premium as payment and in return will provide indemnity to the insured.

The premium differs from person to person, as they differ from one insurance company to another. The amount of premium is calculated by the process of underwriting. It’s a must to check the premium rates of various insurance companies before deciding to buy insurance.

2. Deductible

The deductible is the amount an insured has to pay out of their pocket before they can claim their insurance. This is a way to share the burden as well as a way to ensure nobody is adopting any unfair means while collecting their insurance.

3. Policy Limit

The amount of money by which your insurance will cover you isn’t unlimited. There is a maximum amount up to which you will be covered by your insurer. This upper limit can vary depending on insurance and its validity.

Types of Insurance

There are many kinds of insurance out there. Not only can you insure your crore life, but you can also insure anything you possess. Of all the insurance out there, the following are the main types of insurance:

  • Life Insurance
  • Health Insurance
  • Auto Insurance
  • Home Insurance
  • Travel Insurance
  • Child Plans

Why Is Insurance Important?

The importance of insurance in our day-to-day lives is immense. Here are the reasons insurance is so important:

1. Makes a family financially stable

Any kind of accident makes a family economically unstable because usually people aren’t financially prepared for accidents. As a result, when disaster hits, it causes a lot of distress for a family. But if the family has any insurance such as health insurance, then they won’t have to pay nearly as much during a family member’s illness as they would have had to pay if they were not insured.

2. Reduces Stress

It is stressful to live without insurance since trouble can come from any side. You can never rest easy knowing every time you go out with your car, you may have to pay thousands of dollars because you were involved in an accident. Or you may fall sick out of nowhere and the medical bills might leave you financially crippled.

But if you have insurance, you don’t have to be as stressed as before. Because you know that no matter what happens, you don’t have to bear the entire burden of paying for your car’s damage or medical bills.

3. Can help your family after your death

If you are the bread earner of your family, then your death may leave you in disarray. But having life insurance will ensure your family is paid handsomely after you pass away which will help them cope with the sudden financial loss.

4. Helps shape up your children’s future

If you have child plans, you don’t have to worry as much when it comes to the future of your children. Raising your child to be the best human being they can be and ensuring their education is one of the biggest headaches for parents. But once you buy a child plan, your worries go down by quite a bit as the cost of their education will largely be covered by the plan.

Final Words

As accidents and health issues are becoming more and more common in our lives, it is high time we knew what insurance is and why it is important. Doing so will make us realize how badly we need insurance to ensure the financial safety of both us and our family members in the case of an accident.

FAQs

1. What is the most important function of insurance?

The most important function of insurance is to provide the insured with financial protection. When any accident happens, the insurer shares the burden of the payment which has to be paid by the insured.

2. What are the 6 principles of insurance?

The 6 principles of insurance are:

  • Good faith
  • Interest that can be insured
  • Assurance of Indemnity
  • Proximal cause
  • Guardianship and
  • Contribution.