Insurance is a policy taken to cover the risk of financial loss, i.e. it provides protection against financial loss that may occur. In your case, it was a financial loss due to damage to your car which was covered because you had an insurance policy.
However, such loss may be due to the death of the insured, damage to a property, liabilities or expenses incurred in a car accident, etc. The entity from which insurance is taken is known as the insurance company or an insurance company.
The person who buys the insurance is known as the insured or policyholder. You have to pay a fee to the insurance company to subscribe to the insurance; such a fee is known as an insurance premium. The insurance premium is the financial cost payable in instalments or in a lump sum for obtaining insurance cover. You must pay the premium at pre-defined intervals. Non- payment of premium results in cancellation of the insurance policy.
To purchase an insurance policy, you have to subscribe for insurance by paying a premium at the prescribed intervals. On subscription, you receive a contract or an insurance policy document that you get from the insurance company which contains the terms and conditions subject to which financial loss you suffer will be compensated. In case any loss is suffered by you, you need to claim along with the required documents to the insurance company. The insurance company after investigating and being satisfied with the loss approves the claim. Once the claim is approved, you receive the compensation & you are paid for the damage you have claimed.
Insurance can be broadly classified into two categories, Life insurance and general insurance. As per IRDA (Insurance Regulatory Development Authority of India. The insurance company, in order to reduce the risk undertaken, can also sell the insurance further to other insurance companies, this is known as reinsurance. As of now GIC (General Insurance Corporation of India) is the only reinsurance company in India.
Life Insurance: Life insurance is a policy taken on the life of the insured. In this case, the insurance company agrees to pay a guaranteed sum of money to the beneficiary in case of the death of the policyholder in return for the premiums paid by the policyholder. The premium may be paid in lump sum or instalments.
General Insurance: All insurances other than life insurance are known as general insurance including property insurance, motor insurance, etc. Following are the various types of general insurance:
Motor Insurance: Motor insurance is the policy taken by the car owner to mitigate the financial risk involved while operating the car. In case the car meets with an accident, is damaged or is stolen, the loss borne by the owner is compensated by the insurance company depending upon the coverage of the insurance policy. Car insurance in India is mandatory for all vehicles whether they are for personal or commercial use. As per the provisions of The Motor Vehicles Act, 1988 all the vehicles, which are operating in public places should have a car insurance policy at least to cover third party liability as specified under the Act.
For example, in the case of car insurance, if the car meets with an accident the losses suffered and the cost of repairs will be borne by the insurance company. The amount and extent of compensation depend on the features of the policy opted. In some car insurance cases only, third-party liability is covered whereas in other costs of repair of a car is also covered.
Health Insurance: Health insurance is a policy that provides coverage of the medical and surgical costs of the individual. The insured pays a premium towards the policy and in return, the cost of medical expenses is borne by the insurance company. The payment by the insurance company is either paid directly to the hospital/service provider or the insured has to pay the expenses out of pocket and then it is reimbursed by the insurance company. Payment type, i.e. cashless or reimbursement depends on the type of policy chosen.
For example, if an insured fall ill and is hospitalized, then the expenses incurred on hospitalization and treatment is borne by the insurance company.
Also, check out our video to understand health insurance in details
Travel Insurance: Travel insurance is a policy that provides coverage for the losses incurred while travelling, within the country or internationally. It covers losses incurred due to loss or theft of baggage, loss of important documents, costs incurred due to trip cancellations, medical expenses, etc. Travel insurance policy can be of 2 types, single trip and multi-trip. As the name suggests, a single trip policy is meant for a single trip, it can be taken at the time of booking the trip and it provides the coverage only for the exact duration of the trip. A multi-trip policy is designed for frequent flyers; it covers multiple trips during the coverage period usually a year.
For example, if on a trekking trip the insured suffers from a serious injury in such case the travel insurance company ensures medical treatment. Travel insurance in such cases becomes more relevant as some of the medical insurance policies are not applicable outside the coverage area.
Home Insurance: Home insurance, also known as homeowner’s insurance is a policy that provides coverage for the individual’s home against damage. It covers the loss incurred due to damage of the house due to natural or man-made disasters such as earthquakes, fires, lightning, riots, etc. The damage may be to the structure or the contents of the house.
For example, in case the ceiling or flooring of the house is damaged due to leakage in the pipeline the cost of such loss is borne by the insurance company.
Marine Insurance: Marine insurance is a policy that provides coverage for the damage of cargo, ships, or any other transport through which cargo is transferred. It is of two types, cargo insurance and hull insurance. Cargo insurance provides coverage against the losses that may incur during the transit of goods while they are being transported from one place to another. Such transportation may be via road, rail, sea or air. Hull insurance provides coverage for the damage of vessels or aircraft.
For example, in case if the goods (value being INR 10 lakhs) are transported is damaged during transit. However, the extent of damage is INR 7 lakhs then such loss of 7 lakhs shall be borne by the insurance company.
Commercial Insurance: Commercial insurance is a policy that provides for any unforeseen event that may hamper the normal working of the business. It may be due to property damage, theft, injured employees, etc.
For example, certain commercial insurance policies provide coverage on the liability arising out of lawsuits, judgments or settlements.
Though insurance comes with a cost in the form of the insurance premium and as optimistic individuals we all believe that nothing can go wrong with us. However, there is always a risk that can never be avoided. Also, it provides peace of mind to the insured. For example, in the case of life insurance, though the loss to the family of the insured can never be compensated an insurance policy ensures some financial support in the absence of an earning member. Thus, insurance aims at safeguarding the interest of people from uncertainty by providing the certainty of financial support.