We are surrounded by uncertainties 24x7 because every event has a possibility of an adverse outcome. These uncertainties are called ‘risks’. Generally, there are three ways to deal with any kind of risk - either to hold it, to evade it, or to transfer it to some other entity.
Such transferring or shifting of a risk from one individual to a group is termed as ‘insurance’.
Example: Imagine a group of 500 owners having a car valued at Rs. 4 lakhs each. All of them are at a risk of meeting an accident. However, on an average, only two cars a year are completely lost due to accidents, hence the total loss for the group is Rs. 8 lakhs a year. Hence, the group comes together and contributes Rs. 1,600/- each to meet the uncertainty.
Insurance can be for Life, Health & Non-Life
Under life insurance, the life of the individual is assured. This means that at the time of his/ her death, the family members receive an assured amount. Life insurance not only helps the survivors for their financial requirement after death of the earning member, but also helps in achieving financial goals during the lifetime. It also provides a tool of savings and tax planning.
With growing complexities in life and deteriorating lifestyle, the increased risk of falling prey to Medical problems have increased. In case a primary breadwinner suffers any ailment that makes him unfit for work, the rest of the family will face a severe cash crunch. It would not be possible for them to sustain their lifestyle, repay debts or even afford the high costs of treatment. Here comes 'Health Insurance'..
Every asset has a value and it provides a benefit to the owner. The benefit can be in the form of earnings or any other. If the asset is destroyed, there will be a financial loss i.e. value of asset as required to replace and earnings. Insurance policies indemnify such financial losses to the owner of the asset. General Insurance also indemnifies the owner of the asset against liability that arises due to operation of the asset.