Nature of Insurance

Different kinds of insurances serve different purposes and provide coverage for multiple mishappenings. Although the benefits offered by all insurance policies differ, every insurance contract, be it for any insurance policy, shares the same nature. In this article, we’ll throw light upon the nature of insurance.

What is the nature of insurance?

Insurance is a contract between two parties whereby one party, the insurer, promises to cover the loss incurred by the other party, the insured. Based on the definition and the purpose it serves, the nature that insurance possesses is as follows:

1.) Sharing of risks

Insurance is a device that is used to divide the losses that might occur to an insured individual or his family amongst the masses. Insurance companies collect a huge amount as a premium from all the policyholders. These funds are utilized to cover up the losses that an insured might suffer during the tenure of his policy. In this way, the loss is distributed amongst a huge population, reducing the burden on the loss bearer.

2.) Co-operative device

The cooperation of a large number of people who in effect agree to share the losses is one of the prominent factors that contributes towards the nature of insurance. The insurer might not be able to pay for the losses that may arise due to a particular risk from his own capital. This is where Insurance comes to aid as it allows all the insured people to share and contribute towards the loss of an individual by paying the premium. The paid premium compensates for the financial losses incurred by the individual.

3.) Payment at the occurrence of the event

The insured is paid only at the occurrence of a certain contingency. Otherwise, no payment is made to the insured. In the case of general insurance plans, if the event does not occur in the mentioned period of time, the policy goes void. Moreover, in the case of life insurance plans also, the beneficiary is only paid at the death of the policyholder i.e., at the occurrence of the event.

4.) Insurance is not gambling

Insurance is a method devised to promote the people to undertake risk by providing financial support to them. It serves as a long-term financial resource relieving the risk-taker from worrying about the financial loss he/she might have to suffer. It is not a tool to increase the financial standing of the insured. Rather, it is a tool to help the insured attain back his/her financial position in case of an unforeseen event.

5.) Insurance is not charity

Charity is a fund given without any consideration. Insurance comes with a premium. It is not a charity but a backup plan to offer financial security to the policyholder. A premium has to be paid by the policyholder according to the risk that has been covered under the insurance plan.

Insurance gives the insurance holder peace of mind and relieves him of the financial stress that might be caused due to unexpected circumstances. This allows the insured individual to devote himself completely towards accomplishing his/her goals. Hence, insurance today is not just a facility but more of a necessity.