Definition of insurance

To choose the right kind of insurance for yourself, you must first understand what insurance is. It is necessary for you to know the right definition of insurance and its components. In this article, we’ll be offering an in-depth detail of insurance which will definitely give you a clear picture of it!

Let’s dive in.

What is the definition of insurance?

Insurance is a contract of indemnity, in which an individual or an organization receives financial compensation or reimbursement against the losses from the insurer. It is a shield used to protect the insured against the risk of monetary losses due to the damage caused. Insurance covers the policyholder for the losses incurred to him, his property, or any third party that might have suffered in the event.

There is a huge number of insurance policies offered by various insurance companies that provide coverage for different risks. Each of these policies have different terms and conditions that differ depending on the type of insurance and the company offering it. With such varied options available in the market, through deep research one can easily find a policy that suits his needs and fits his budget.

Components of insurance

There are a few components that are common for every kind of insurance policy. They are:

1. Premium

Premium is the amount that the policyholder has to pay as a consideration for the coverage offered in the policy. It is regarded as the insured’s share for covering up the losses. The insurance premium is determined by calculating the risk covered. The higher the chances of risk, the higher goes the premium.

2. Policy limit

It is the maximum amount that the insurer will pay for the damages caused to the insured on the occurrence of the event mentioned in the policy. Policies that have a high limit, have higher premiums. For life insurance policies, the maximum amount that the insurer will pay is known as the face value. This amount is paid to the beneficiary on the happening of the contingency, that is the death of the insured.

3. Deductibles

While understanding the terms and conditions of the policy, an individual must be extremely careful and attentive while going through this part. A deductible is the amount of loss that the insured is required to pay out of his pocket. These losses are excluded and not compensated under the insurance cover.

These deductibles differ from policy to policy and insurer to insurer. Generally, policies with a large number of deductibles carry less premium value as the policyholder has to pay a major part of the amount from his side.

The most common types of personal insurance policies that are offered by almost all insurance companies are auto, health, home, and life insurance policies. Out of these car or auto insurance is a compulsion by law. Moreover, there are other policies offered by financial institutions that cover the risks of businesses too! From your health to your profession, insurance has got you covered in every aspect of your life!