What you need to know about insurance
In its most basic form, insurance means protection for you against financial losses because of the happening of some event in the future. It is obtained by paying somebody to take on the risk on your behalf. The person or company taking on the risk is called the insurer, you are called the insured and the payment that you make is called a premium. The contract between the insured and the insurer is called an insurance policy and in return for the insured paying a specified amount as a premium, the insurer agrees to compensate for financial losses on the happening of the event covered by the policy (for instance, in a fire insurance policy, the insurer will make good damages caused by fire). The insured will pay out on your making an insurance claim.
You can buy insurance risk coverage for a number of risks and some examples of insurance that is available are life insurance, health insurance, mortgage insurance and so on. It is up to the insured to select the risk for which he or she desires coverage. Put another way, life insurance will cover the risk of your death, health insurance will cover your medical bills if you become ill and require attention or hospitalization and car or auto insurance will cover damage to your car as well as to third parties in the event of a car accident.
You may feel that because you have never had to make a claim on your insurance, you are wasting your money when you write that premium check month after month. This is not really the truth because you are protecting your assets or yourself from a financial loss that could wipe you out in return for a small fixed payment of a premium. Apart from the peace of mind that this will provide, insurance coverage is mandatory in many cases would either because of the law (as in auto insurance) or because of your banker (as in the risk coverage that may be required for you to obtain a mortgage).
When you purchase insurance coverage of any kind from an insurer, certain important legal considerations have to be clearly understood:
- Contract of indemnity – The insurer will reimburse (indemnify) the insured if certain losses incurred up to the extent of interest of the insured.
- Insurable interest – The insurance coverage will be valid only if the insured has an insurable interest which means that he will directly suffer the loss. For instance, in property insurance, the insured must have a direct interest in the property.
- Contract of utmost good faith – An insurance contract is a contract of utmost good faith where the insured must be care every material detail to the insurer. Failure to do so (for example failure to disclose a pre-existing medical condition in health insurance) can invalidate the coverage.
You must not assume that every type of risk is automatically covered because you have purchased the appropriate coverage from the insurer. Insurers can protect themselves in several ways such as a deductible, which requires you to bear the first loss up to a predetermined value. You could also have an exclusion in which a peril is totally excluded from the policy (for instance, almost all property insurance policies exclude coverage of damage caused by war). You should therefore read the small print of the policy to determine the exact extent of your coverage.
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