Types of Insurance
Insurance- The term ‘Insurance’ refers to a contract between two parties, one known as insured and the other insurer, whereby the insurer in exchange of a fixed amount of money agrees to compensate the insured against risks of loss or damage caused by happening of certain events. The document containing the contract is known as ‘Insurance Policy’.
The person whose risk is insured is called ‘Insured’ or ‘Assured’ and the person or the company which insures is known as ‘Insurer’,or ‘Assurer’. The consideration in return for which the insurer agrees to compensate the insured is known as ‘Insurance Premium’.
Types of Insurance-
Several types of insurance facilities are available to meet the many and varied needs of those who want protection against risks. All types of insurance can be classified into two broad categories-
(1) Life insurance, and
(2) Non-life insurance or General Insurance-
b. Marine insurance,
c. Health insurance,
d. Motor vehicle insurance,
e. Social insurance,
f. Fidelity insurance ,
g. Cattle Insurance
h. Burglary Insurance, are the major types of non-life/ general insurance.
Types of Insurance-
(1) Life insurance-
Life insurance may be defined as ‘a contract whereby the insurer, in consideration of a premium, undertakes to pay certain sum of money or an annuity, either on the death of the insured or on the expiry of a specified period, whichever is earlier.
The premium may be paid annually, half yearly, quarterly or monthly, but it must be paid regularly during the period of the policy. The sum assured is paid to the policy holder on the expiry of the policy. In case of death before the expiry, the sum is paid to his nominees.
Life insurance is not a contract of indemnity because sum assured is always payble and only the time of payment is uncertain, Therefore, life insurance is also called ‘llfe assurance”, In life insurance, insurable interest must be present at the time of taking insurance policy. A person has insurnble interest in his life as well as in the life of his/ her spouse. A person is also said to have insurable interest in the lives of other persons on whom he is dependent or whose death will cause him a pecuniary loss. For example, a creditor has insurable interest in the life of his debtor until the loan is repaid. A partner bas insurable interest in the life of another partner.
”Life insurance is a contract of guarantee”.
Essential elements of a life insurance contract-
1. It is based on good faith. The assured must disclose all material facts about his health whether asked by the insurer or not.
2. It is based on insurable interest in the life assured. The insurable interest must be present at the time of taking-up the policy.
3. It is not based on the principle of indemnity as there can be no compensation for the life lost. However, the amount payable by the insurance company after a certain number of years or on the death of the assured, whichever is earlier, is fixed at the time of contract.
4. All the essential elements of a valid contract must be present, e.g., offer and acceptance, consideration, lawful object, free consent, etc
Importance of Life Insurance-
Life insurance occupies the most important position among all forms of insurance. It offers the following advantages:
(1) Protection against risk- Life insurance provides protection to the family after the death of the insured. In case of premature death the insured sum of money is paid to the dependents of the insured.
(ii) Provision for old age- A person can make a provision for old age by taking a life policy. The policy holder feels financially secured and can enjoy economic independence after retirement. He need not be a financial burden on his family.
(iii) Thrift and savings- Premium is generally payable in installments. Therefore, life insurance encourages people to save money. A habit of thrift and savings is developed among people.
(iv) Investment- Life insurance is a good method of investment. A person can pay small amounts as premium over a number of years. He can build a fund for higher education or marriage of children, for building a residential house, etc. In case of financial need loan can be taken against the life policy.
(v) Tax savings- The premium paid on a life insurance policy is allowed as a deduction from income for calculating income tax under the Income Tax Act. Therefore, a person can reduce his tax burden by taking a life policy.
(vi) Capital formation-The amount collected by life insurance companies is invested in industry and other developmental activities. Such investment encourages economic development of the country as well as social welfare. (vii) Employment generation- Life insurance companies provide employment opportunities to millions of people. Many people who act as agents get the opportunity for self employment.
(viii) Social Security – Life insurance provides security against risks of old age and premature death of people. Besides, social security is provided to workers through the Employees State Insurance scheme whereby accidental risks are covered.
(ix) Contribute to Economic Development : Funds with the insurance companies are invested in various types of securities and projects, which contribute to economic development of the country .Thus, life insurance provides both protection against death and investment of savings.
(2) Non-life or General Insurance-
Non-Life or General Insurance provides insurance for theft, fire, marine and other losses Fidelity , Cattle , Burglary. General insurance mainly covers assets such as vehicles, buildings, jewellery, stock-in-trade, machinery, etc.
”General insurance is a contract of indemnity”.
Types of non-life insurance-
Fire insurance may be defined as a contract in writing whereby the insurance company in consideration of a sum of money (called premium) undertakes to indemnify the insured (owner of the property) for any loss or damage to the insured property or goods caused by accidental fire. A fire insurance policy is generally for one year, Fire insurance policy provides protection against loss or damage by fire. Fire insurance is a contract of indemnity. The insured is compensated for the loss he has actually suffered (subject to the maximum amount insured) on account of destruction of property by fire. A contract of fire insurance specifies the maximum amount to which the insurance company can be held liable.
The term ‘fire’ must satisfy the following conditions:
(a) There must be actual fire or ignition. If the property is damaged by heat or smoke without ignition, the insurance company will not be liable to pay compensation. Loss by lightning, electricity and explosion is not covered unless they result in fire which causes loss. Loss due to riot, war and natural calamities is not covered by fire insurance.
(b) The fire should be accidental and not intentional. Loss caused by mere negligence of the insured person is covered. But loss caused due to wilful or malicious act is not covered.
In case of fire insurance, the insurable interest must exist at the time of loss by fire Owner of goods property, agent in the principal’s goods, pledger, in the pledged, goods, partner in the firm’s assets have insurable interest.
The essential features of a contract of fire insurance-
The essential features of a contract of fire insurance are as under:
1. It is a contract of uberrimae fidei, ie utmost good faith. Both the insured and the insurer must disclose everything which is in their knowledge and can affect the contract of insurance. The disclosure by the insured regarding the risks to his property and regarding the nature of the property must be fuil and fair.
2. It is a contract of indemnity. The insured is entitled to recover only the actual amount of loss from the insurer, in the event of any loss or damage to the subject-matter of insurance. He cannot be allowed to make profit out of this contract. The maximum amount of compensation is limited to the value for which the policy has been taken.
3. The insured must have an insurable interest in the subject-matter of insurance. The insurable interest must exist both at the time of insurance and at the time of loss.
4. The insurer is liable to make good for the loss only when fire is the proximate cause of damage or loss.
5. It is a contract from year to year. It generally comes to an end after the expiry of the year and may be renewed, after making payment of the premium within the days of grace.
6. The fire insurance contract must also fulfil all the requirements of a valid contract as laid down by the Contract Act, as for example, offer and acceptance, consideration, free consent, capacity of the parties and lawful object.
Importance of fire insurance-
Importance The purpose of fire insurance is to provide protection against risk of loss by fire The insured person is placed in the same financial position as he/she was before the los by fire happened. Fire can cause huge loss to the house of a person. In case of business the entire factory, office or godown may be destroyed by fire. The businessman may Jose his source of livelihood and may become bankrupt. Fire insurance helps him to restart his business with the help of money received from the insurance company.
Marine insurance is a contract of indemnity whereby the insurance company undertakes to indennify the insured for the loss or damage to the ship or cargo or freight on account of marine adventure. It is a contract under which the insurer agrees to compensate the insured against risks incidental to marine adventure. A policy of marine insurance may be taken out for a particular period or for a particular voyage. Subject matter of marine insurance Marine insurance is of the following types:
(i) Hull Insurance- In this type of marine insurance the ship is insured against sea perils. Hull insurance covers risk of loss or damage to the ship. The ship may be insured for a particular period or for a particular trip.
(ii) Cargo insurance- Cargo means the goods being transported through a ship. In this case goods are insured against perils of the sea.
(iii) Freight insurance- When freight is payable at the port of destination, the shipping company may not get the freight if the goods are lost during transit. Therefore, the shipping company may insure the freight to be received. This is called freight insurance. Importance Shipping involves huge risks of several types. The ship and its cargo may be lost/ destroyed /damaged due to accident, piracy, storm, etc. As the journey /dispatch of goods by a ship involves considerable time, possibility of loss is unusually high. A marine insurance policy provides protection against risks involved in marine. The cost of a ship is very high and therefore owners of ships always take hull insurance policies. Marine insurance is one of the oldest types of insurance.
It plays a vital role in foreign trade by providing protection against perils of the sea. Sea perils include piracy, capture by enemy, seizure, restraint, jettison, barratry, etc. Jettison means throwing away of goods over board in order to avoid sinking of ship, while barratry refers to a fraudulent breach of duty by master or staff of the ship. Sinking of ship after being hit by a rock, loss of cargo due to sea water or heat, storms at sea, collision of one ship with another, looting of a ship, etc., are other examples of sea perils.
Marine insurance provides protection against these risks to both importers and exporters, and shipping company. In marine insurance, insurable interest must exist both at the time of insurance and at the time of marine loss. Owner of goods/ship, captain and employees of the ship have such interest.
3.Health insurance –
Health insurance means insurance for protection of health against various types of diseases. In case of ill health, the insured person receives the cost of treatment / hospitalisation upto the insured amount. Mediclaim is the most popular health insurance policy. Under this policy, the insured person gets cashless facil- ity from the specified hospitals. The cost of treatment (upto 5 lacs) in the hospital is directly paid for by the insurance company to the hospital. Health insurance also covers loss of income from sickness in addition to medical expenses. There are several types of health insurance policies.
(i) Basic medical expenses: This policy covers expenses for services of doctors and expenses incurred on medicines.
(ii) Major medical expenses: This policy covers costs of hospitalisation.
(iii) Disability income policy: This policy covers loss of income during the period of illness.
(iv) Long term hospitalisation: This policy covers costs of hopitalisation for a long period due to serious diseases. In health insurance, insurable interest must exist at the time of taking the insurance policy. Mediclaim policy covers consultation fee of the doctor, cost of medicines, and hospital expenses.
Importance of Health insurance:-
Health insurance offers the following advantages:
(i) By paying small amount of premium, the insured person gets coverage for heavy cost involved in hospitalisation for serious diseases like heart attack, brain tumour, cancer, kidney failure, etc.
(ii) The premium paid for health insurance is allowed as a deduction (up to the specified amount) from taxable income under the Income-tax Act.
(iii) In case of sudden hospitalisation, the insured and his/her family is saved from heavy expenditure.
(iv) Health insurance contributes significantly to the economic development of the country by making the people of the country healthy.
(v) Health insurance industry provides protection to social development.
4.Motor vehicle insurance –
Motor vehicle insurance is a type of non-life insurance that covers the following types of risks-
(i) Risk of loss or damage to motor vehicles (cars, scooters, motorcycles, autos, tempos, buses and other types of vehicles) due to accident, fire, theft, etc.
(ii) Risk of injury, death, etc. of the driver.
(iii) Risk of loss due to injury or death of third party by the vehicle in an accident.
Motor vehicle insurance is of two types :
(a) Third Party Insurance: In case the insured vehicle causes injury to any person or vehicle, the owner of the vehicle will compensate the third party insurer will compensate the insured.
(b) Comprehensive Insurance: This insurance covers all types of risks causing damage or loss to the insured vehicle. Importance The owner of motor vehicle receives cost of the vehicle in case of loss by fire, theft, accident, etc. With the help of the money received from the insurance company, he/she can again buy a new motor vehicle. The compensation payable to third party in case of accident can also be recovered from the insurance company. A person who earns his livelihood from his taxi, auto or bus is not deprived permanently from his source of income. He can restart his occupation with the help of the money received under the insurance policy. To mitigate the financial hardship caused to the people who get injured or killed by motor vehicles, the Motor Vehicles Act, 1939 has made it compulsory for the owners of motor vehicles to insure against the risk of liability to third parties.
Social insurance is an insurance that provides social security to working class. Employee State Insurance, workmen’s compensation scheme, provident fund, pension, group insurance and unemployment insurance are examples of social insurance. Under social insurance, both the employee and the employer make periodical contributions with or without a subsidy from the Government. The funds so collected are invested. The total accumulated amount is paid to the employee on his/her retirement. Importance After retirement, an employee gets a substantial amount in lump sum or in the form of monthly pension. This helps the employee and his/her dependents to meet their living expenses. In the absence of social insurance, the employee and his/her dependents would starve. They will also become a burden on the society. Social insurance provides social security to the employee and his/her dependents.
Fidelity insurance means an insurance policy that provides protection against risk of loss caused by fraud dishonesty and embezzlement on the part of the employee (s) of the insured. Fidelity insurance is a contract between an insurance company and an employer. Fidelity insurance is taken when employees are incharge of cash and goods of the employer.
The basic features of fidelity insurance are:
(i) Subject matter: In other types of insurance, the subject matter is tangible. But in fidelity insurance it is intangible as fidelity of employees cannot be seen or touched.
(ii) Service conditions: The employer can not change the service conditions of his employee (s) without consulting the insurance company. Thus, fidelity insurance seeks to indemnify the employer against direct pecuniary loss that he may sustain due to fraud or dishonesty by an employee in the course of his employment. The basis for fidelity insurance lies in the fiduciary relationship between an employer and his employees wherein the employer reposes faith and trust in his employees.
Importance Fidelity insurance protects an employer from the financial loss caused by dishonesty on the port of his/her employees. The employer is guaranteed against loss up to the amount of policy. The insurance company compensates the employer for the loss suffered on account of dishonesty, fraud, embezzlement by his employees.