Insurance Types, Function, Advantages and Disadvantages

Insurance Types, Function, Advantages and Disadvantages

Human beings are exposed to different types of risks such as loss of property by fire, theft, accident, untimely death of the earning persons, professional or business failure etc. Such risks may cause a large scale financial losses. It is not possible to eliminate such risks but can be reduced and or recovered. It is insurance which bears the risks and assures the recovery of the financial losses so caused. 


The concept of insurance may be illustrated with the help of the following example. Suppose that, in a village there are 100 houses with the monetary value within the range of $400 to $60. As the experience of the past, there is a probability of falling average 2 houses into fire each year. Every house is exposed to this risk and thus every family is likely to suffer from a loss of around $50 each year. Therefore, all the houses may raise a common fund by collecting a certain amount say $20 per annum per house/family so that the two householders who fall under fire can be financially compensated. 

Insurance is a means of compensating the probable losses caused by any uncertain events in consideration to the payment of a certain fees called premium.

In order to understand the concept of insurance you should be familiar to the following terms. 
  • Insured
    The person or party who seeks protection against a particular risk and pays a certain amount in consideration to the recovery of the financial loss is known as insured.
  • Insurer
    The party (i.e insurance company) which undertakes to protect the insured from the specified risks and the loss so caused in consideration to a certain premium received from the insured is known as insurer. 
  • Premium
    It is the fees paid by the insured to the insurer as the consideration of the insurance contract for the assurance of the recovery of financial loss so caused. 
  • Insured amount
    It is the agreed financial value of the future loss caused by certain events. Insurance is made for the recovery of this value. 
  • Insurance policy
    It is the contract between the insured and the insurer containing the details of the terms and conditions of a certain insurance.

    From the study of the above meaning and definition, insurance may be considered to be a better means of shifting and dividing the business risks. Hence, insurance may be defined as a contract between the insured and insurer by which the later undertakes or compensate the former with a fixed sum of money as the recovery of the pre decided financial loss in consideration to a certain premium. Nowadays, insurance has become a business and it is initiated by insurance companies.

What are the Types of Insurance

There are various types of insurance as the difference in the financial risks. Today we will discuss common types of insurance. 

What is Marine Insurance

Marine insurance is an agreement between the insurer and the insured by which the former undertakes to indemnify the latter, in the manner they have agreed, the financial loss caused by a certain sea perils in consideration to a certain premium paid periodically or in lump sum. It is believed that it was the first developed form of insurance. In the ancient times, international trade used to be done mainly through sea routes and the sea routes were subject to various risks like collision of a ship with rocks or other ships, attack by sea pirates etc. Such risks were attached both to the ship and cargo. Hence, the marine insurance was felt necessary to be secured from the loss of ship, cargo etc. In course of time other types of insurance were also developed gradually. 
There are mainly three components (types) of marine insurance viz, cargo insurance, hull insurance and freight insurance. 
  • Cargo insurance is the insurance of the goods loaded into the ship for delivery tot he party authorized. 
  • Hull insurance refers to the insurance of the full body of the ship against the probable loss caused by any specified sea perils during a particular journey or for a certain period of time. 
  • Freight insurance refers to the insurance of the probable loss of freight charges for the non delivery of goods by means of any specified sea perils. 

What is Life Insurance

Life insurance came into existence after the development of the marine insurance. The first life insurers were the marine insurers who started issuing life insurance policies on the life of the merchants, ship captains and the crew of the ship sailing along with the goods.

Every human beings wants the financial security of his/her life on one hand and the financial security of his dependent after his death on the other. So it is a contract to recover the financial uncertainty of the human life in some extent from business valuation method. It is not a contract of indemnity like other insurance. Hence, life insurance may be defined as the insurance by which the insurer undertakes to pay the fixed sum of money on the happening of some events against the receipt of the premium. Thus life insurance contains the elements of security as well as investment. 
There are commonly four types of life insurance, I have briefly introduced below. 
  • Whole life policy
    It refers to the insurance policy made for the whole life of the insured. In this policy, the insured has to pay the premium throughout his life or up to certain years usually up to the retirement age and the insurer compensates the specified amount to the nominee or dependent after the death of the insured. 
  • Endowment policy
    It is the policy which is made for a fixed period of time say, 15, 20 and 25 years etc. In this policy, the insured has to pay a certain premium up to the specified period and sum insured is receivable to the insured on the maturity date or to his nominee or dependent on his death whichever is earlier. It is done for the financial security of the insured at the old age or to his dependent after his death. 
  • Term policy
    It is such a policy, which is made for a dependent only on the death of the policy holder. If he/she remains survived till the specified period the insurer will not be liable to pay the sum. It is neither saving nor investment. 
  • Multipurpose policy
    It is the one, which covers several benefits through a single policy such as, old age benefit, retirement age benefit, income assurance benefit, dependent protection benefit etc. against the payment of a certain premium. 

What is Fire Insurance

Fire insurance is a measure, which provides security against the risk of fire. It was initiated from England when London city was caught by fire devastation in 1666 A.D. Fire insurance is a contract between the insurer and insured by which, the former undertakes to indemnify the latter the financial loss caused by fire in consideration to a certain premium paid periodically or in lump sum. In this policy, the insured must prove that the loss is caused by fire and that must be unintentional accident case. It is generally made by the owners of cinema house, business premises, residential house etc. 

What are the Miscellaneous Insurance

There are many other types of insurance policies for different financial risks. 
  • Motor insurance
    The insurance which is made to compensate the loss of the vehicles by means of the pre decided events which may be caused by accident or other causes is known as motor insurance.
  • Burglary/theft insurance
    The insurance which is made for getting the compensation of the losses of property caused by dacoit, burglary or theft that must not be by negligence of the insured is called burglary insurance. 
  • Credit insurance
    It is the insurance in which a person or business firm is assured by the insurer to compensate the loss incurred due to the insolvency of the debtor in consideration to the payment of a certain premium. 
  • Personal accident insurance
    It is the insurance, which provides safety to the insured against the risk of disability due to accident against the payment of a certain premium. 
  • Health insurance
    It is the insurance under which the insured is paid with a sum of money to cover his/her hospitalization and medical expenses in case of health loss against the payment of a certain premium. 
  • Aviation insurance
    The insurance, which is made to compensate the financial loss caused by aviation risks and accidents is known as aviation insurance.

What are the Function of Insurance

The function of insurance may vary with its nature and types. It means the functions of fire or marine insurance may differ from that of life insurance etc. Today I am going to discuss some common function of the insurance. 

Providing financial losses

Insurance provides assurance for the compensation of pre-decided and accidental financial losses against the premium paid by the insured.

Reducing financial losses

Human beings are exposed to different kinds of risks in their personal as well as business life. Such risks may cause great financial loss. Insurance acts as a mechanism to reduce or eliminate the financial loss due to various risks by forecasting the chances of such happenings and suggesting for their controlling measures.

Mobilization of capital

Insurance accumulates fund in terms of insurance premium from the parties willing to get secured from the financial losses. Compensation is made to the insured who are actually suffered and productive sectors. Hence, insurance accumulates fun and mobilized into different areas. 

Maintaining Financial stability

Risks and uncertainties create instability in the financial sector. Insurance companies help to maintain financial stability by assuring for the compensation of the losses caused by various risks and thus, promotes the performance efficiency, which leads to financial stability.

Also read: Office Importance, Types and Function

What are the Advantages of Insurance

Assures for financial compensation

Insurance provides financial security to the insured. It gives guarantee of compensation against large financial losses in return of small premium. 

Reduction of risks

Human beings are exposed to different kinds of financial risks, which may cause large financial losses. It is not possible to eliminate the risks but it can be forecasted and reduced by applying some precautionary measures. Insurance helps in reducing risks by suggesting for pre caution measures on one side and by sharing the losses to a group of person who has agreed to join the common pool. 

Encouragement to saving and investment

In the insurance agreement, the insured has to pay a certain regular premium to the insurer in return to the compensation of the probable future loss or compensation at old age or compensation after his/her death. Insurance is thus a method of collecting saving from the parties willing to get secured from the financial risks. Hence, it encourages persons to make regular savings. 

Basis of credit

An insured can easily get loan by pledging insurance policy as a security from the insurance company itself. Besides, financial institutions grant credit facilities on the pledge of the properties which are being insured. 

Maintains economic stability

Financial risks and uncertainties pushes the entire economy into instability. It is a very bad sign to total business and social sectors. Insurance assures the compensation of the financial losses caused by the specified future events and considerably helps in maintaining economic stability. 

Promotes business activities

Business sector is more risky sector. The chances of fire in the go down, loss of stocks by theft, explosion in the ship, train or plane etc. are more frequent in this sector. Insurance takes away these risks and promotes and develops business activities in consideration to a nominal charge i.e premium. 

Provides employment opportunities

As insurance has become business in the modern day business world, hundreds of entrepreneurs and thousands of employees have been engaging in this line. Hence, by establishing and developing insurance companies, it has provided employment opportunities to thousands of people as per their qualification and calibre. 

What are the Disadvantages of Insurance

Besides a number of benefits, insurance has also some limitations. 
  • Insurance leads to negligence as the insured feels that he/she can be compensated for any loss or damage. 
  • Insurance companies do not make the compensation promptly on maturity of the policy or for the financial losses as the expectation of the insured. 
  • It may lead to the crimes in the society as the beneficiaries of the policy may be tempted to commit crimes to receive the insured amount.
  • Although insurance encourages savings, it does not provide the facilities that are provided by bank. 

Post a Comment

6 Comments

  1. a lot of insurance solutions present discounts to careful drivers The idea have a amazing driving record. Discounts, just like insurance bundling discounts AS WELL AS home owner's discounts, also assist in reducing your current monthly premiums. ensure that to request your insurance representative pertaining to all about all the discounts That You will be eligible for. insurance news

    ReplyDelete
    Replies
    1. Hi Thanks for the comment on my blog post "Insurance Types, Function, Advantages and Disadvantages" Keep visiting wisenepali.

      Delete
  2. There is often any incorrectly recognized knowing concerning cargo insurance, shipping insurance. The most significant false impression is actually "who's in charge of precisely what? " and then "how a lot are generally many people in charge of? ".
    Truckers Insurance

    ReplyDelete
  3. Insurance coverage fraudulence is amongst the genuine risks going through the industry. of boasts contain a danger factor; bad religion accommodates, professional medical expense, investigation expense to name nevertheless some.
    Truckers Insurance

    ReplyDelete
  4. Thanks for sharing this informative blog it seems very helpful. i was looking for same kind of content about general insurance.

    ReplyDelete