Insurance: How It Works, Types and Components

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The property and life of a person are always surrounded by the risk of destruction, death, and disability, thus resulting in financial losses.

Insurance is an agreement between the insured (individual) and the insurer (company). In case of loss, the company is promised to pay for any potential damages or contingencies – a death or destruction of property; the individual pays a certain amount in return monthly.  

How Does Insurance Work

A range of insurance types and policies are available. Any individual, company or business can find an insurance company. The most common types of Personal Insurance are health, life, vehicle and homeowners.

On the other hand, businesses require different types of insurance. For instance, a restaurant may need a policy or package covering injuries or damages in the kitchen while cooking.  An auto driver needs a policy that covers accidents or damages. 

What are Insurance Policy Components?

Before choosing any policy, you must know how this works because a good understanding will help you choose the right one according to your requirement.

There are three crucial components of insurance are:

  • Premium
  • Policy Limit
  • Deductible

Premium

Basically, a policy premium refers to its price – a monthly cost. The premium is discussed and fixed based on the individual and their business’s risk profile. For instance, if you have several luxurious and expensive supercars and history of irresponsible driving, the premium cost will be higher. Conversely, the price will be comparatively less if someone has a perfect driving record and a mid-range car. Though some insurance companies charge different premiums for the same package, you must find the one that better fits your needs.

Policy Limit

The policy limit is the total amount an insurer will pay under a certain policy. The maximum amount is set per period (annually or monthly), and injury or loss; is also known as the lifetime maximum.

Deductible

The deductible is a specific amount that the policyholder must pay before the insurer pays a claim. Policies with extremely high deductibles are relatively less expensive.

What is General Insurance?

General Insurance is a set of non-life insurance policies like cars, houses, travel or health, meaning they do not come under life insurance. 

Types of Insurance

Though there are many types of insurance, the most common are:

  1. Health Insurance: people with chronic health issues or who need regular medical attention look for these policies. This policy covers an array of diseases and ailments, covering expensive medical costs.  Furthermore, it will cover treatment and hospitalization as well.
  2. Home Insurance: also known as homeowners’ insurance, protects your home against theft, vandalism and damage. It also covers injuries from home accidents such as natural calamities, perils, fires, lightning, and earthquakes. 
  3. Education Insurance: this insurance is akin to a life insurance policy. It is designed so that you can pay for their higher education when your child reaches 18 years or above. Your child will be the life-assured recipient of the fund, with the parents being the policy owner.
  4. Auto Insurance: this insurance is extremely important after buying a car or vehicle because in case you are involved in an accident, or the vehicle is vandalised, damaged, or stolen. The insured will pay the amount annually, and in return, the company will cover almost or all costs of the damaged vehicle.
  5. Life insurance: as the name refers, this insurance is insurance on your life. You buy life insurance to ensure your family or dependents are financially secure in case you die unexpectedly. Therefore, it is important to have life insurance if you are the only source of income for your family.
  6. Travel insurance covers not only the damages and loss regarding travelling but Allied Bank Personal Loan also lets you lend money for travelling or other purposes. 

Reasons Why Having Insurance is Important?

Buying insurance is crucial as it ensures that you are financially stable and secure in facing any issue and problem that comes your way. A few other reasons why buying it is necessary are mentioned below:

  • No matter how well off you are, an unexpected event can dent your financial position easily.
  • It provides complete protection for you and your family, ensuring that everyone is safe in an emergency.
  • Though none of us can predetermine the future, any tragedy can leave us financially, physically, or mentally strained.  Therefore, insurance is important to save yourself from stress and tension as it gives you complete peace of mind.
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