Insurance can be defined as a contract between two parties in which one party agrees to undertake the risk of the other party. The basic motive for buying insurance is to seek financial protection against losses that may arise due to the occurrence of an uncertain event. The party who is getting the risk cover is known as the “insured” or the “assured” and the one who bears the risk is called the “insurer” or the “assurer”. The insured pays a fixed sum which is known as premium in order to avail this protection.
The premium collected from the entire group of insured members is collected and a pool is created. The insurance company acts as a trustee and any loss that occurs (due to the occurrence of an uncertain event) is paid from that pool. Insurance is based on the principle of risk sharing; the risk of a few people is shared by a large group of people who are exposed to the same kind of risk. The insured has a choice of making the premium payments monthly, quarterly, half-yearly or annually. Insurance is a tool for risk management. The uncertain events that it protects from can be loss of life, physical injury, illness or damage of an asset.
The insurance products available are varied and insurance is available to suit almost all requirements of an individual. However all insurance products can be broadly classified in two categories: life insurance and non life insurance.
Life Insurance
Life Insurance covers the risk of financial loss that is associated with the loss of one’s life. In case a person dies the dependants may have to suffer financial hardships due to the loss of income generated by that person. By buying a life insurance policy the person can protect the family and those dependant on him/her against financial damages.
Under the category of life insurance the main types of products available are Whole Life Insurance, Money Back Policy, Endowment Plan, Child Insurance, Term Insurance etc. These products though aimed at basically covering the risk associated with the death of an individual cater to different financial needs of the insured and also help in financial planning. The buyer must analyse his requirements and then buy the product accordingly.
Non-Life Insurance or General Insurance
When insurance is taken to protect yourself from the losses that may occur to assets like a car, house or business then it is termed as general insurance. General Insurance product range includes car insurance, home insurance, corporate insurance, health insurance, marine insurance, fire insurance, personal accident insurance etc.
The principle on which both life insurance and general insurance are based is same. The difference lies in the risk that they cover.