Insurance

Insurance may be described as a social device to reduce or eliminate risks of loss to

life and property. It is a provision which a prudent man makes against inevitable
contingencies, loss or misfortune.

Insurance is the modern method by which men make the uncertain, certain and the
unequal, equal. It is the means by which success to the support of the weak and
weak secure, not by favour sent by right duly purchased and paid for, the support
of the strong. Under the plan of insurance, a large number of people associate
themselves by sharing risks attached to individuals. As in private life, in business
also there are dangers and risks of different kinds. The aim of all types of insurance
is to make provision against such dangers. The risks which can be insured against
include fire, the perils of sea (marine insurance), death (life insurance) and,
accidents and burglary. Any risk contingent upon these, may be insured against at a
premium a commensurate with the risk involved. Thus, collective bearing of risks
is insurance.

Insurance is a contract whereby one person, called the insurer, undertakes in return
for the agreed consideration called premium, to pay to another person called the
insured, a sum of money or its equivalent on specified event.

FUNCTIONS OF INSURANCE

The functions of insurance may be categorized as below :

I. Primary Functions :
II. Secondary Functions
III. Other Functions

I. Primary Functions: The primary functions of insurance include the following

a) Provide protection : The primary purpose of insurance is to provide

protection against future risk, accidents, and uncertainty. Insurance cannot
check the happening of the risk, but can certainly provide for the losses of risk.
b) Collective bearing of risk : Insurance is a device to share the financial loss
of few among many others. All the insured contribute the premiums towards a
fund and out of which the persons exposed to a particular risk is paid.

c) Evaluation of risk : Insurance determines the probable volume of risk by

evaluating various factors that give rise to risk. Risk is the basis for
determining the premium rate also.

d) Provide certainty against risk : Insurance is a device which helps to change

from uncertainty to certainty. The function of insurance is primarily to decrease
the uncertainty of events.”

II. Secondary Functions

a) Prevention of losses : Insurance cautions individuals and businessmen to

adopt suitable device to prevent unfortunate consequences of risk by
observing safety instructions; installation of automatic sparkler or alarm
systems, etc. Prevention of losses cause lesser payment to the assured by
the insurer and this will encourage for more savings by way of premium.
Reduced rate of premiums stimulate for more business and better protection
to the insureds.
b) Small capital to cover larger risks : Insurance relives the businessmen and
others from security investments, by paying small amount of premium
against larger risk and uncertainty. There is no need for them to invest
separately for security purpose and this money can be invested in other
activities. 3.
c) Contributes towards the development of larger enterprises : Insurance
provides development opportunity to those larger enterprises having more
risks in their setting up. Even the financial institutions may be prepared to
give credit to sick industrial units which have insured their assets including
plant and machinery.

IV. Other Functions: There are indirect functions of insurance which

benefit the economy indirectly. Some of such functions are : 1.
 a) Means of savings and investment : Insurance serves as savings
and investment. Insurance is a compulsory way of savings and it
restricts the unnecessary expenses by the insureds. For the
purpose of availing income-tax exemptions also, people invest
in insurance.
b) Promotes exports : Insurance makes the foreign trade risk free
through different types of policies issued under marine insurance
cover. In case of loss of cargo and others due to marine perils the
insurance company makes good the loss. .
c) Provides social security : Through various social protection
plans, the insurance provides social security to people. It not
only provide security at the time of death but also provides
assistance to the insureds at the time of sickness, old age,
maternity etc.

Principles of Insurance
The concept of insurance is risk distribution among a group of people. Hence, cooperation
becomes the basic principle of insurance.

To ensure the proper functioning of an insurance contract, the insurer and the insured have to
uphold the 7 principles of Insurances mentioned below:

1. Utmost Good Faith

2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization

Let us understand each principle of insurance with an example.

Principle of Utmost Good Faith

The fundamental principle is that both the parties in an insurance contract should act in good
faith towards each other, i.e. they must provide clear and concise information related to the
terms and conditions of the contract.
The Insured should provide all the information related to the subject matter, and the insurer
must give precise details regarding the contract.

Example – Jacob took a health insurance policy. At the time of taking insurance, he was a
smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the Insurance
company will not be liable to bear the financial burden as Jacob concealed important facts.

Principle of Proximate Cause

This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle
applies when the loss is the result of two or more causes. The insurance company will find
the nearest cause of loss to the property. If the proximate cause is the one in which the
property is insured, then the company must pay compensation. If it is not a cause the property
is insured against, then no payment will be made by the insured.

Example –

Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be
demolished. While demolition the adjoining building was damaged. The owner of the
adjoining building claimed the loss under the fire policy. The court held that fire is the
nearest cause of loss to the adjoining building, and the claim is payable as the falling of the
wall is an inevitable result of the fire.

In the same example, the wall of the building damaged due to fire, fell down due to storm
before it could be repaired and damaged an adjoining building. The owner of the adjoining
building claimed the loss under the fire policy. In this case, the fire was a remote cause, and
the storm was the proximate cause; hence the claim is not payable under the fire policy.

Principle of Insurable interest

This principle says that the individual (insured) must have an insurable interest in the subject
matter. Insurable interest means that the subject matter for which the individual enters the
insurance contract must provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss.

Example – the owner of a vegetable cart has an insurable interest in the cart because he is
earning money from it. However, if he sells the cart, he will no longer have an insurable
interest in it.

To claim the amount of insurance, the insured must be the owner of the subject matter both at
the time of entering the contract and at the time of the accident.
Principle of Indemnity

This principle says that insurance is done only for the coverage of the loss; hence insured
should not make any profit from the insurance contract. In other words, the insured should be
compensated the amount equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same financial position as
he was before the loss occurred. Principle of indemnity is observed strictly for property
insurance and not applicable for the life insurance contract.

Example – The owner of a commercial building enters an insurance contract to recover the
costs for any loss or damage in future. If the building sustains structural damages from fire,
then the insurer will indemnify the owner for the costs to repair the building by way of
reimbursing the owner for the exact amount spent on repair or by reconstructing the damaged
areas using its own authorized contractors.

Principle of Subrogation

Subrogation means one party stands in for another. As per this principle, after the insured, i.e.
the individual has been compensated for the incurred loss to him on the subject matter that
was insured, the rights of the ownership of that property goes to the insurer, i.e. the company.

Subrogation gives the right to the insurance company to claim the amount of loss from the
third-party responsible for the same.

Example – If Mr A gets injured in a road accident, due to reckless driving of a third party,
the company with which Mr A took the accidental insurance will compensate the loss
occurred to Mr A and will also sue the third party to recover the money paid as claim.

Principle of Contribution

Contribution principle applies when the insured takes more than one insurance policy for the
same subject matter. It states the same thing as in the principle of indemnity, i.e. the insured
cannot make a profit by claiming the loss of one subject matter from different policies or
companies.

Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and
with company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can
claim the full amount from Company A but then he cannot claim any amount from Company
B. Now, Company A can claim the proportional amount reimbursed value from Company B.

Principle of Loss Minimisation

This principle says that as an owner, it is obligatory on the part of the insurer to take
necessary steps to minimise the loss to the insured property. The principle does not allow the
owner to be irresponsible or negligent just because the subject matter is insured.

Example – If a fire breaks out in your factory, you should take reasonable steps to put out the
fire. You cannot just stand back and allow the fire to burn down the factory because you
know that the insurance company will compensate for it.
Types of Insurance
There are two broad categories of insurance:

1. Life Insurance
2. General insurance

Life Insurance – The insurance policy whereby the policyholder (insured) can ensure
financial freedom for their family members after death. It offers financial compensation in
case of death or disability.

While purchasing the life insurance policy, the insured either pay the lump-sum amount or
makes periodic payments known as premiums to the insurer. In exchange, of which the
insurer promises to pay an assured sum to the family if insured in the event of death or
disability or at maturity.

Depending on the coverage, life insurance can be classified into the below-mentioned types:

 Term Insurance: Gives life coverage for a specific time period.

 Whole life insurance: Offer life cover for the whole life of an individual
 Endowment policy: a portion of premiums go toward the death benefit, while the remaining is
invested by the insurer.
 Money back Policy: a certain percentage of the sum assured is paid to the insured in intervals
throughout the term as survival benefit.
 Pension Plans: Also called retirement plans are a fusion of insurance and investment. A portion
from the premiums is directed towards retirement corpus, which is paid as a lump-sum or monthly
payment after the retirement of the insured.
 Child Plans: Provides financial aid for children of the policyholders throughout their lives.
 ULIPS – Unit Linked Insurance Plans: same as endowment plans, a part of premiums go toward
the death benefit while the remaining goes toward mutual fund investments.

General Insurance – Everything apart from life can be insured under general insurance. It
offers financial compensation on any loss other than death. General insurance covers the loss
or damages caused to all the assets and liabilities. The insurance company promises to pay
the assured sum to cover the loss related to the vehicle, medical treatments, fire, theft, or even
financial problems during travel.

General Insurance can cover almost anything, and everything but the five key types of
insurances available under it are –

 Health Insurance: Covers the cost of medical care.

 Fire Insurance: give coverage for the damages caused to goods or property due to fire.
 Travel Insurance: compensates the financial liabilities arising out of non-medical or medical
emergencies during travel within the country or abroad
 Motor Insurance: offers financial protection to motor vehicles from damages due to accidents, fire,
theft, or natural calamities.
  Home Insurance: compensates the damage caused to home due to man-made disasters, natural
calamities, or other threats

Types of Insurance

Insurance policies provide protection against the various types of uncertainties that can occur
in the life of an individual. Having health insurance can help you cover up for the expenses
paid for any diseases, while an accident insurance can help you in getting cover for any kind
of accidents that may occur.

There are various types of insurance in the market due to the presence of a large number of
insurance companies. The types of Insurance that will be discussed are:

1. Life Insurance

2. General Insurance (which includes fire insurance, health insurance and marine insurance)

Let us discuss these types in detail.

1. Life Insurance:
Life insurance is a type of insurance policy in which the insurance company undertakes the
task of insuring the life of the policyholder for a premium that is paid on a
daily/monthly/quarterly/yearly basis.

Life Insurance policy is regarded as a protection against the uncertainties of life. It may be
defined as a contract between the insurer and insured in which the insurer agrees to pay the
insured a sum of money in the case of cessation of life of the individual (insured) or after the
end of the policy term.

For availing life insurance policy the person needs to provide some details like age, medical
history and any type of smoking or drinking habits.

As there are many requirements of persons for availing a life insurance, the requirements can
be needs of family, education, investment for old age, etc.

Some of the types of life insurance policies that are prevalent in the market are:
a. Whole life policy: As the name suggests, in this kind of policy the amount that is insured
will only be paid out to the person who is nominated and it is only payable on the death of the
insured.

Some insurance policies have the requirement that premium should be paid for the whole life
while others may be restricted to payment for 20 or 30 years.

b. Endowment life insurance policy: In this type of policy the insurer undertakes to pay a
fixed sum to the insured once the required number of years are completed or there is death of
the insured.

c. Joint life policy: It is that type of policy where the life insurance is availed by two persons,
the premium for such a policy is paid either jointly or by each individual in the form of
installments or a lump sum amount.

In the case of such a policy the assured sum is provided to both or any one of the survivors
upon the death of any policyholder. These types of policy are taken mostly by husband and
wife or between two partners in a business firm.

d. Annuity policy: Under this policy, the sum assured or the policy money is paid to the
insured on a monthly/quarterly/half-yearly or annual payments. The payments are made only
after the insured attains a particular age as dictated by the policy document.

e. Children’s Endowment policy: Children’s endowment policy is taken by any individual

who wants to make sure to meet the expenses necessary for children’s education or for their
marriage. Under this policy, the insurer will be paying a certain sum of money to the children
who have attained a certain age as mentioned in the policy agreement.

2. General Insurance:
General Insurance is related to all other aspects of human life apart from the life aspect and it
includes health insurance, motor insurance, fire insurance, marine insurance and other types
of insurance such as cattle insurance, sport insurance, crop insurance, etc.

We will be discussing the various types of general insurances in the following lines.

a. Fire Insurance: Fire insurance is a type of general insurance policy where the insurer
helps in paying off for any damage that is caused to the insured by an accidental fire till the
specified period of time, as mentioned in the insurance policy.

Generally, fire insurance policy is valid for a period of one year and it can be renewed each
year by paying a premium, which can be a lump sum or in installments.
The claim for a fire loss must satisfy the following conditions:

i. It should be an actual loss

ii. The fire must be accidental and not done intentionally

b. Marine Insurance: Marine insurance is a contract between the insured and the insurer. In
marine insurance, the protection is provided against the perils of the sea. The instances of
dangers in sea can be collision of ship with rocks present in sea, attacking of the ship by
pirates, fire in ship.

Marine insurance covers three different types of insurance which are ship hull, cargo and
freight insurance.

Ship or hull insurance: As the ship is exposed to many dangers at the sea, the insurance
covers for losses caused by damage to the ship.

Cargo Insurance: The ship carrying cargo is subjected to many risks which can be theft of
cargo, lost goods at port or during the voyage. Therefore, insuring the cargo is essential to
cover for such losses.

Freight Insurance: In the event of cargo not reaching the destination due to any kind of loss
or damage during transit, the shipping company does not get paid for the freight charges.
Freight insurance helps in reimbursing the loss of freight caused due to such events.

Marine insurance is a contract of indemnity where the insured can recover the cost of actual
loss from the insurer in event of any loss occurring to the insured item.

c. Health Insurance: Health insurance is an effective safeguard for protection against rising
healthcare costs. Health insurance is a contract that is made between an insurer and an
individual or a group where the insurer agrees to provide health insurance against certain
types of illnesses to the insured individual or individuals.

The premium can be paid in installments or as a lump sum amount and health insurance
policy is renewed every year by paying the premium.

The health insurance claims can be done either directly in cashless or reimbursement availed
after treatment is done. Health insurance is available in the form of Mediclaim policy in
India.
d. Motor vehicle insurance: Motor vehicle insurance is a popular option for the owners of
motor vehicles. Here the owners’ liability to compensate individuals killed by negligence of
motorists is borne by the insurance company.

e. Cattle Insurance: In case of cattle insurance, the owner of the cattle receives an amount in
the event of death of the cattle due to accident, disease or during pregnancy.

f. Crop Insurance: Crop insurance is a contract for providing financial support to the
farmers in the event of crop failure due to drought or flood.

g. Burglary Insurance: Burglary insurance comes under the insurance of property. Here the
insured is compensated in the event of a burglary for the loss of goods, damage occurred to
household goods and personal effects due to burglary, larceny or theft.
 Health Insurance

Health insurance covers cost of an insured individual's medical and surgical expenses. Subject to the
terms of insurance coverage, either the insured pays costs out-of-pocket and is subsequently
reimbursed or the insurance company reimburses costs directly.

What is Health Insurance?

Health insurance is an insurance product which covers medical and surgical expenses of an
insured individual. It reimburses the expenses incurred due to illness or injury or pays the
care provider of the insured individual directly.

Types of Health Insurance

Every individual is different and has a unique set of needs. A single health insurance product
is not enough to cover every person's individual requirements. This is precisely where there
are a number of different types of health insurance plans available. Let's take a look at what
they are:

1. Individual Health Insurance

You can purchase an individual health insurance policy to provide cover for yourself, your
spouse, your children and your parents. These policies typically cover all kinds of medical
expenses, including hospitalisation, daycare procedures, hospital room rent and more. Under
an individual health insurance plan, each member has their own sum insured amount. So, let's
say you've taken an individual plan for yourself, your spouse and both your parents with a
sum insured of INR 8 lakhs. Each of you will be able to claim a maximum amount of 8 lakhs
per policy year against your health insurance.

2. Family Floater Health Insurance

A family floater plan allows you to cover your family members under a single policy and
everybody shares the sum insured amount. These plans are typically more affordable than
individual plans since the sum insured is shared. Let's say you purchase a family floater plan
for you and your spouse with a sum insured of INR 8 lakhs. In a single policy year, you can
make claims worth only INR 8 lakhs. Your spouse may make claims worth INR 6 lakhs and
you could make claims worth INR 2 lakhs or vice-versa. Typically, family floater plans are
ideal for young nuclear families.
3. Senior Citizens Health Insurance

These health plans have been designed specifically keeping the medical needs and
requirements of senior citizens in mind. Most senior citizens policies offer additional cover,
such as domiciliary hospitalisation and even some psychiatric benefits. Since older citizens
are more likely to have health issues, these policies may require a full medical check-up
beforehand and could be more expensive than regular insurance policies.

4. Critical Illness Insurance

There are a number of lifestyle-related diseases that are on the rise. Health issues such as
cancer, stroke, kidney failure and cardiac diseases can be very expensive to deal with and
manage long-term. This is precisely why critical illness insurance policies have been created.
They can either be purchased as a rider or add-on with your regular health insurance plan or
separately as their own plan. These policies offer cover for very specific issues and often
provide claim payouts as a single lump sum payment after the diagnosis of a critical illness.

5. Group Health Insurance

Unlike individual and family floater policies, group health insurance plans can be purchased
by a group manager for a large number of individuals. For example, an employer can
purchase group insurance for all their employees or a building secretary may purchase such a
plan for all the residents of the building. These plans are fairly affordable, but they often only
provide cover for basic health issues. Employers often purchase these plans as an additional
benefit for employees.
 Benefits of Health Insurance

Purchasing health insurance is crucial for a number of reasons. Let's take a look at the most
important benefits of our health insurance policies:

1. Helps Deal with Rising Medical Costs

People purchase health insurance policies to safeguard their finances against ever-rising
medical costs. An accident or medical emergency could end up costing you more than a few
thousand rupees. With a medical insurance plan, you enjoy cover for everything from
ambulance charges to daycare procedures, making it easier for you to get the care you need to
recover.

2. Critical Illness Cover

Many health insurance policies will also offer cover for critical illnesses at an additional cost.
Given the rising incidence of lifestyle-related diseases today, this is another crucial cover to
have. You will be provided with a lump sum payout in case you are diagnosed with any of
the covered critical illnesses. These issues are often very expensive to deal with and manage,
so critical illness cover is another vital benefit of having health insurance.

3. Easy Cashless Claims

Every health insurance provider will tie-up with a number of network hospitals where you
can enjoy cashless claims. This makes the entire process of receiving emergency medical care
much easier. At a network hospital, you aren't really required to pay for any of the covered
treatments. For all valid claims, we'll take care of the medical costs, without you having to
pay for anything, except non-covered expenses and the mandatory deductibles.

4. Added Protection

If you enjoy cover under a group health insurance plan, you may wonder why you should
purchase your own health insurance policy. Well, individual health insurance plans offer
provider more and better cover than group plans. Additionally, if you happen to leave the
group at any time, you risk losing the cover, which could make you and your finances
vulnerable.
5. Tax Savings

Under Section 80D of the Income Tax Act, 1961, premiums paid towards the upkeep of
health insurance policies are eligible for tax deductions. For a policy for yourself, your
spouse, your children and parents below the age of 60, you can claim a deduction of up to
INR 25,000 per year from your taxable income. If you've also purchased a policy for a parent
who is over the age of 60, you can claim an additional deduction of INR 50,000.
Various government sponsored insurance schemes in
India
1) Pradhan Mantri Jeevan Jyoti Bima Yojana -
This scheme offers life cover of Rs. 2 lakhs to the people of India. People aged 18 to 50 and
having a bank account can avail of the benefits of this scheme for a premium of Rs. 330/-
annually. The premium gets debited automatically from the insured person’s bank account.
2) Pradhan Mantri Suraksha Bima Yojana -
offers accident insurance to the people of India. People aged 18 to 70 and having a bank
account can avail of the benefits of this scheme. The PMSBY scheme offers an annual cover
of Rs. 1 lakh for partial disability and Rs. 2 lakhs for total disability/death for a premium of
Rs. 12. The premium gets debited automatically from the insured person’s bank account.
3) Life Cover under Pradhan Mantri Jan Dhan Yojana -
Pradhan Mantri Jan Dhan Yojana bank account comes with a built in accidental insurance
cover of 1 lakh and Rs. 30,000/-life cover.
4) Pradhan Mantri Fasal Bima Yojana -
This scheme provides a comprehensive insurance cover against failure of the crop thus
helping in stabilising the income of the farmers. The PMFBY covers all Food & Oilseeds
crop and Annual Commercial / Horticultural crops.
5) Pradhan Mantri Vaya Vandana Yojana -
For benefit of citizens aged 60 & above, optioning holders to get assured guarantee return of
8% under this
6) Restructured Weather Based Crop Insurance Scheme (RWBCIS) -
Weather based Crop Insurance scheme aims to mitigate the hardship of the insured farmers
against the likelihood of financial loss on account of anticipated crop loss resulting from
adverse weather conditions relating to rainfall, temperature, wind, humidity, etc.
7) Varishtha Pension Bima Yojana -
For benefit of citizens aged 60 & above, optioning holders to get assured guarantee return of
9%.