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HomeBusinessInsuranceTypes,Function,Advantagesand
Disadvantages
InsuranceTypes,Function,Advantages
andDisadvantages
11:26PM
PostedByBhimChimoriya
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.
Insured
The person or party who seeks protection against a particular risk
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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
WhataretheTypesofInsurance
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
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
WhatisFireInsurance
devastationin1666A.D.Fireinsuranceisacontractbetweentheinsurer
and insured by which, the former undertakes to indemnify the latter the
WhataretheMiscellaneousInsurance
There are many other types of insurance policies for different financial
risks.
Motorinsurance
Theinsurancewhichismadetocompensatethelossofthevehicles
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
Healthinsurance
It is the insurance under which the insured is paid with a sum of
Aviationinsurance
The insurance, which is made to compensate the financial loss
insurance.
WhataretheFunctionofInsurance
Thefunctionofinsurancemayvarywithitsnatureandtypes.Itmeansthe
functionsoffireormarineinsurancemaydifferfromthatoflifeinsurance
etc.TodayIamgoingtodiscusssomecommonfunctionoftheinsurance.
Providingfinanciallosses
Reducingfinanciallosses
Humanbeingsareexposedtodifferentkindsofrisksintheirpersonalas
wellasbusinesslife.Suchrisksmaycausegreatfinancialloss.Insurance
acts as a mechanism to reduce or eliminate the financial loss due to
Mobilizationofcapital
made to the insured who are actually suffered and productive sectors.
Hence,insuranceaccumulatesfunandmobilizedintodifferentareas.
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MaintainingFinancialstability
Risksanduncertaintiescreateinstabilityinthefinancialsector.Insurance
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
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
peopleaspertheirqualificationandcalibre.
WhataretheDisadvantagesofInsurance
Besidesanumberofbenefits,insurancehasalsosomelimitations.
Insuranceleadstonegligenceastheinsuredfeelsthathe/shecan
becompensatedforanylossordamage.
facilitiesthatareprovidedbybank.
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