What Is Insurance?
Seems like you are here to know about Insurance meaning in simple words. An insurance policy is a legally binding contract between an insurance company and the person. The person who buys commonly called the “insured” or the policyholder.
In exchange for payment of a specified sum of money, called the “premium”. The insurance company agrees to pay the “beneficiary” of the policy a fixed or declared amount of money.
Another way of looking at insurance is to consider some points.
- It is a group of people getting together and paying on a regular basis
- If any of them needs to claim off the insurance due to calamity or damage,
- the money is there to enable this to happen.
In that way, insurance serves as a risk transfer mechanism after that people or businesses can shift some of their uncertainties or risks to the insurance companies. The insurance companies charge a fee, known as a premium, for accepting these risks, However in return, agrees to pay for the financial losses that the policyholder or insured may suffer in future.
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Basic Terminologies Associated To Insurance
Some of the basic terminologies associated to Insurance are:-
Application – The first questionnaire an insurance applicant fills out when he applies for insurance. This form basically asks for information about the applicant and as well as subject of insurer (i.e., the applicant’s car, houses, personal property, etc.).
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Cancellation – The termination of insurance coverage during the policy period.
This has further three divisions-
- Flat Cancellation – The cancellation of a policy as of its effective date, without any premium charge.
- Pro-rata Cancellation – When the policy is terminated at midterm by the insurance company, the earned premium is calculated only for the period for which the coverage was provided.
. For example: An annual premium policy of Rs 60,000 is cancelled after 40 days of coverage However the earned premium would be calculated as follows:
Earned Premium = 40/365 days x Rs 60,000
Earned Premium = Rs 6,575.
- Short-rate Cancellation – the earned premiums charged would be more than the pro-rata earned premium. If policyholder himself request’s to deactivate the policy prior to expiry date. Generally, the return premium would be approximately 90 percent of the pro-rata return premium.
Decline – This refers to a situation when the company refuses to accept the request for insurance coverage.
Effective Date – This is the date on which the insurance policy begins.
Expiration Date – This is the date on which the insurance policy ends.
Insurance Agent – A person authorized by, and acting on behalf of the insurer, to sell all classes of insurance that the insurance company is licensed to sell.