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3/9/2017 InsuranceTypes,Function,AdvantagesandDisadvantages

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InsuranceTypes,Function,Advantages
andDisadvantages
11:26PM

PostedByBhimChimoriya

Insurance Types, Function, Advantages and


Disadvantages

Human beings are exposed to different types of risks such as loss of


property by fire, theft, accident, untimely death of the earning persons,

professionalorbusinessfailureetc.Suchrisksmaycausealargescale
financial losses. It is not possible to eliminate such risks but can be
reduced and or recovered. It is insurance which bears the risks and
assurestherecoveryofthefinanciallossessocaused.

Theconceptofinsurancemaybeillustratedwiththehelpofthefollowing
example. Suppose that, in a village there are 100 houses with the

monetaryvaluewithintherangeof$400to$60.Astheexperienceofthe
past,thereisaprobabilityoffallingaverage2housesintofireeachyear.

Everyhouseisexposedtothisriskandthuseveryfamilyislikelytosuffer
fromalossofaround$50eachyear.Therefore,allthehousesmayraisea
common fund by collecting a certain amount say $20 per annum per
house/family so that the two householders who fall under fire can be
financiallycompensated.

Insuranceisameansofcompensatingtheprobablelossescausedbyany
uncertain events in consideration to the payment of a certain fees called
premium.

In order to understand the concept of insurance you should be


familiartothefollowingterms.

Insured
The person or party who seeks protection against a particular risk

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and pays a certain amount in consideration to the recovery of the

financiallossisknownasinsured.
Insurer
Theparty(i.einsurancecompany)whichundertakestoprotectthe
insured from the specified risks and the loss so caused in
consideration to a certain premium received from the insured is
knownasinsurer.

Premium
Itisthefeespaidbytheinsuredtotheinsurerastheconsideration
of the insurance contract for the assurance of the recovery of
financiallosssocaused.
Insuredamount
Itistheagreedfinancialvalueofthefuturelosscausedbycertain
events.Insuranceismadefortherecoveryofthisvalue.
Insurancepolicy
Itisthecontractbetweentheinsuredandtheinsurercontainingthe
detailsofthetermsandconditionsofacertaininsurance.

Fromthestudyoftheabovemeaninganddefinition,insurancemay

be considered to be a better means of shifting and dividing the


business risks. Hence, insurance may be defined as a contract
between the insured and insurer by which the later undertakes or
compensatetheformerwithafixedsumofmoneyastherecovery
of the pre decided financial loss in consideration to a certain
premium. Nowadays, insurance has become a business and it is
initiatedbyinsurancecompanies.

WhataretheTypesofInsurance

There are various types of insurance as the difference in the financial


risks.Todaywewilldiscusscommontypesofinsurance.

WhatisMarineInsurance

Marineinsuranceisanagreementbetweentheinsurerandtheinsuredby
which the former undertakes to indemnify the latter, in the manner they
have agreed, the financial loss caused by a certain sea perils in
consideration to a certain premium paid periodically or in lump sum. It is
believed that it was the first developed form of insurance. In the ancient
times,internationaltradeusedtobedonemainlythroughsearoutesand
the sea routes were subject to various risks like collision of a ship with
rocksorotherships,attackbyseapiratesetc.Suchriskswereattached

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both to the ship and cargo. Hence, the marine insurance was felt
necessarytobesecuredfromthelossofship,cargoetc.Incourseoftime
othertypesofinsurancewerealsodevelopedgradually.
Therearemainlythreecomponents(types)ofmarineinsuranceviz,cargo
insurance,hullinsuranceandfreightinsurance.

Cargoinsuranceistheinsuranceofthegoodsloadedintotheship
fordeliverytothepartyauthorized.
Hull insurance refers to the insurance of the full body of the ship
againsttheprobablelosscausedbyanyspecifiedseaperilsduring
aparticularjourneyorforacertainperiodoftime.
Freight insurance refers to the insurance of the probable loss of
freight charges for the non delivery of goods by means of any
specifiedseaperils.

WhatisLifeInsurance

Life insurance came into existence after the development of the marine
insurance. The first life insurers were the marine insurers who started
issuing life insurance policies on the life of the merchants, ship captains
andthecrewoftheshipsailingalongwiththegoods.

Everyhumanbeingswantsthefinancialsecurityofhis/herlifeononehand
andthefinancialsecurityofhisdependentafterhisdeathontheother.So
itisacontracttorecoverthefinancialuncertaintyofthehumanlifeinsome
extentfrombusinessvaluationmethod.Itisnotacontractofindemnitylike
otherinsurance.Hence,lifeinsurancemaybedefinedastheinsuranceby

which the insurer undertakes to pay the fixed sum of money on the
happening of some events against the receipt of the premium. Thus life

insurancecontainstheelementsofsecurityaswellasinvestment.
Therearecommonlyfourtypesoflifeinsurance,Ihavebrieflyintroduced

below.

Wholelifepolicy
It refers to the insurance policy made for the whole life of the

insured. In this policy, the insured has to pay the premium


throughouthislifeoruptocertainyearsusuallyuptotheretirement

age and the insurer compensates the specified amount to the


nomineeordependentafterthedeathoftheinsured.

Endowmentpolicy
Itisthepolicywhichismadeforafixedperiodoftimesay,15,20

and 25 years etc. In this policy, the insured has to pay a certain

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premiumuptothespecifiedperiodandsuminsuredisreceivableto

theinsuredonthematuritydateortohisnomineeordependenton
hisdeathwhicheverisearlier.Itisdoneforthefinancialsecurityof

theinsuredattheoldageortohisdependentafterhisdeath.
Termpolicy

Itissuchapolicy,whichismadeforadependentonlyonthedeath
of the policy holder. If he/she remains survived till the specified

periodtheinsurerwillnotbeliabletopaythesum.Itisneithersaving

norinvestment.
Multipurposepolicy

Itistheone,whichcoversseveralbenefitsthroughasinglepolicy
suchas,oldagebenefit,retirementagebenefit,incomeassurance

benefit, dependent protection benefit etc. against the payment of a


certainpremium.

WhatisFireInsurance

Fire insurance is a measure, which provides security against the risk of


fire. It was initiated from England when London city was caught by fire

devastationin1666A.D.Fireinsuranceisacontractbetweentheinsurer
and insured by which, the former undertakes to indemnify the latter the

financial loss caused by fire in consideration to a certain premium paid


periodicallyorinlumpsum.Inthispolicy,theinsuredmustprovethatthe

loss is caused by fire and that must be unintentional accident case. It is

generally made by the owners of cinema house, business premises,


residentialhouseetc.

WhataretheMiscellaneousInsurance

There are many other types of insurance policies for different financial

risks.

Motorinsurance
Theinsurancewhichismadetocompensatethelossofthevehicles

by means of the pre decided events which may be caused by


accidentorothercausesisknownasmotorinsurance.

Burglary/theftinsurance
The insurance which is made for getting the compensation of the

lossesofpropertycausedbydacoit,burglaryortheftthatmustnot
bebynegligenceoftheinsurediscalledburglaryinsurance.

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Creditinsurance
Itistheinsuranceinwhichapersonorbusinessfirmisassuredby

theinsurertocompensatethelossincurredduetotheinsolvencyof
thedebtorinconsiderationtothepaymentofacertainpremium.

Personalaccidentinsurance
Itistheinsurance,whichprovidessafetytotheinsuredagainstthe

risk of disability due to accident against the payment of a certain


premium.

Healthinsurance
It is the insurance under which the insured is paid with a sum of

money to cover his/her hospitalization and medical expenses in


caseofhealthlossagainstthepaymentofacertainpremium.

Aviationinsurance
The insurance, which is made to compensate the financial loss

caused by aviation risks and accidents is known as aviation

insurance.

WhataretheFunctionofInsurance

Thefunctionofinsurancemayvarywithitsnatureandtypes.Itmeansthe

functionsoffireormarineinsurancemaydifferfromthatoflifeinsurance
etc.TodayIamgoingtodiscusssomecommonfunctionoftheinsurance.

Providingfinanciallosses

Insurance provides assurance for the compensation of predecided and


accidentalfinanciallossesagainstthepremiumpaidbytheinsured.

Reducingfinanciallosses

Humanbeingsareexposedtodifferentkindsofrisksintheirpersonalas

wellasbusinesslife.Suchrisksmaycausegreatfinancialloss.Insurance
acts as a mechanism to reduce or eliminate the financial loss due to

various risks by forecasting the chances of such happenings and


suggestingfortheircontrollingmeasures.

Mobilizationofcapital

Insurance accumulates fund in terms of insurance premium from the


parties willing to get secured from the financial losses. Compensation is

made to the insured who are actually suffered and productive sectors.
Hence,insuranceaccumulatesfunandmobilizedintodifferentareas.

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MaintainingFinancialstability

Risksanduncertaintiescreateinstabilityinthefinancialsector.Insurance

companies help to maintain financial stability by assuring for the


compensation of the losses caused by various risks and thus, promotes

theperformanceefficiency,whichleadstofinancialstability.

Alsoread:OfficeImportance,TypesandFunction

WhataretheAdvantagesofInsurance

Assuresforfinancialcompensation

Insuranceprovidesfinancialsecuritytotheinsured.Itgivesguaranteeof
compensationagainstlargefinanciallossesinreturnofsmallpremium.

Reductionofrisks

Humanbeingsareexposedtodifferentkindsoffinancialrisks,whichmay

causelargefinanciallosses.Itisnotpossibletoeliminatetherisksbutit
can be forecasted and reduced by applying some precautionary
measures.Insurancehelpsinreducingrisksbysuggestingforprecaution

measuresononesideandbysharingthelossestoagroupofpersonwho
hasagreedtojointhecommonpool.

Encouragementtosavingandinvestment

In the insurance agreement, the insured has to pay a certain regular


premiumtotheinsurerinreturntothecompensationoftheprobablefuture

loss or compensation at old age or compensation after his/her death.


Insuranceisthusamethodofcollectingsavingfromthepartieswillingto
get secured from the financial risks. Hence, it encourages persons to
makeregularsavings.

Basisofcredit

Aninsuredcaneasilygetloanbypledginginsurancepolicyasasecurity
from the insurance company itself. Besides, financial institutions grant
creditfacilitiesonthepledgeofthepropertieswhicharebeinginsured.

Maintainseconomicstability

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Financialrisksanduncertaintiespushestheentireeconomyintoinstability.
It is a very bad sign to total business and social sectors. Insurance

assuresthecompensationofthefinanciallossescausedbythespecified
futureeventsandconsiderablyhelpsinmaintainingeconomicstability.

Promotesbusinessactivities

Businesssectorismoreriskysector.Thechancesoffireinthegodown,
lossofstocksbytheft,explosionintheship,trainorplaneetc.aremore

frequent in this sector. Insurance takes away these risks and promotes
and develops business activities in consideration to a nominal charge i.e
premium.

Providesemploymentopportunities

As insurance has become business in the modern day business world,


hundreds of entrepreneurs and thousands of employees have been
engaging in this line. Hence, by establishing and developing insurance
companies, it has provided employment opportunities to thousands of

peopleaspertheirqualificationandcalibre.

WhataretheDisadvantagesofInsurance

Besidesanumberofbenefits,insurancehasalsosomelimitations.

Insuranceleadstonegligenceastheinsuredfeelsthathe/shecan
becompensatedforanylossordamage.

Insurance companies do not make the compensation promptly on


maturityofthepolicyorforthefinanciallossesastheexpectationof
theinsured.
It may lead to the crimes in the society as the beneficiaries of the

policy may be tempted to commit crimes to receive the insured


amount.
Although insurance encourages savings, it does not provide the

facilitiesthatareprovidedbybank.

About Author: Bhim is a 22 Year old guy and the owner of


wisenepali.comheisblessedwiththeartofblogging...Read More ...Find
meingoogle+andgooglepluspage

6comments:
http://www.wisenepali.com/2014/12/insurancetypesfunctionadvantagesand.html 7/9
3/9/2017 InsuranceTypes,Function,AdvantagesandDisadvantages

1.
MdSaddam

a lot of insurance solutions present discounts to careful drivers


The idea have a amazing driving record. Discounts, just like
insurance bundling discounts AS WELL AS home owner's
discounts, also assist in reducing your current monthly
premiums.ensurethatto request your insurance representative
pertainingtoallaboutallthediscountsThatYouwillbeeligiblefor.
insurancenews

Reply Delete
Replies

1.
BhimChimoriya

Hi Thanks for the comment on my blog post "Insurance


Types, Function, Advantages and Disadvantages" Keep
visitingwisenepali.

Delete
Reply

2.
silverking

There is often any incorrectly recognized knowing concerning


cargo insurance, shipping insurance. The most significant false
impressionisactually"who'sinchargeofpreciselywhat?"and
then"howalotaregenerallymanypeopleinchargeof?".
TruckersInsurance

Reply Delete

3.
silverking

Insurance coverage fraudulence is amongst the genuine risks


goingthroughtheindustry.ofboastscontainadangerfactorbad
religion accommodates, professional medical expense,
investigationexpensetonameneverthelesssome.
TruckersInsurance

Reply Delete

4.
TomCraig

Thanks for sharing this informative blog it seems very helpful. i


waslookingforsamekindofcontentaboutgeneralinsurance.

Reply Delete

5.
Unknown

super

Reply Delete

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