The world is a risky place and various catastrophes can befall an individual. Insurance can minimize financial liability in the case of a disaster or accident and give peace of mind.

Insurance Defined

Insurance is a tool to reduce financial loss or hardship. It is a contract between the insured and an insurance provider under which the insured can be paid for certain losses. It helps to cover the cost of unexpected events such as theft, illness, property damage, or death. The protection or coverage received can be for a limited period of time or throughout lifetime.

In return for the protection, the insured pays a premium. Premiums are the amount paid periodically, depending on the type of insurance and policy. The amount of premiums paid are based on the probability that one will suffer a claimable loss. Other factors that are considered in computing premiums can be the insured’s age, health, lifestyle or family history. For health, home, and auto insurance policies, the amount of premiums also depends on the deductible. This is the amount of one’s claim one agrees to pay before the insurer pays the rest. Choosing a higher deductible will lessen premiums because one is agreeing to pay for a larger part of the loss.

How insurance works

When a hardship or loss occurs, a claim is made. This is an official request for the insurer to pay for a covered loss. Supporting documents will be required, depending on the type of loss (for example, photographs of an injury or property damage for an accident or property insurance claim, or a death certificate for a life insurance claim) during claims investigation.

Different types of insurance

 Life insurance: Life insurance provides payment to the insured’s family and loved ones after the insured’s death. The insured names a person or persons (beneficiary/beneficiaries) who will receive the death benefit as stated in the policy.

  Health insurance: Some types can supplement income if one suffers a major illness or injury. Other types can pay for medical expenses if one becomes ill while on vacation.

  Property and Casualty (General) Insurance: Property insurance covers losses or damage to one’s home or personal possessions, car or business. Casualty insurance shields the insured from legal liability for losses caused by injury to other people or damage to property of others.

 Key terms

  Policy: a legal contract between the insured and the insurer. It details what risks are covered, under what circumstances the insurer will make a payment to the insured, how much money and what type of benefit one will receive if he or she makes a claim.

  Policyholder: the insured or the person covered under the policy.

  Coverage: the amount of protection the insured has bought. It is also the maximum amount the insurance company will pay if one makes a claim for loss or event covered by the policy.

  Benefit: the amount the insurer will pay the insured if the insurer accepts the claim.

  Premium: periodic payment by insured to insurer to cover future claims.

  Claim: the official notice to the insurer to pay for a loss or event covered by insurance policy.

  Beneficiary: this is the person or entity the insured names or assigns to receive the proceeds of the policy. A beneficiary can be revocable or irrevocable.

  Deductible: amount the insured must pay before the insurer pays out the rest.

  Term: the time period one is covered by the policy.

It is important to read the policy thoroughly to check what it covers and what it does not cover so that there will be no surprises when the time to claim comes. If one withholds important information or lies on the application, it can be the basis for cancelling the policy, or worse, refusing one’s claim in the future.