Insurance Basics and Principles

The primary purpose of insurance is to provide financial protection against unexpected losses. This is achieved through the pooling of risk, where a group of individuals pay premiums to a company that then compensates those who experience a covered loss.

Insurance involves protecting against uncertain risks (e.g., car accidents), while assurance covers events that are certain to occur, like death in life assurance.

Pooling of risk means that a large group of individuals pay premiums into a common fund. This fund is then used to compensate members who experience a covered loss, spreading the risk across the entire group.

<p>A premium is a regular payment made by the insured party to the insurance company. It serves as the financial contribution to the pool of risk and enables the company to provide compensation for losses.</p> Signup and view all the answers

<p>Indemnity refers to compensation provided to the insured party for a covered loss, returning them to their original financial position. It is directly related to 'risk' because it aims to mitigate the financial impact of the event that the insurance policy was designed to protect against.</p> Signup and view all the answers

<p>An example of insurance covering a specific risk is health insurance, which protects individuals against the financial burden of medical expenses due to illness or injury.</p> Signup and view all the answers

<p>Assurance, like life assurance, deals with events that are certain to occur, such as death. This is based on certainty. Insurance, on the other hand, covers risks that are uncertain but likely to occur, like car accidents. This relies on probability.</p> Signup and view all the answers

<p>Insurance is beneficial in situations where an individual faces significant financial risk. For example, if someone owns a house, home insurance would protect them from financial loss if the house was damaged by a fire or other covered event.</p> Signup and view all the answers

<p>To compensate the insured for damages, ensuring they are returned to their original financial position before the loss occurred.</p> Signup and view all the answers

<p>Insurable interest means having a financial connection to the insured property or asset. It ensures that the insured will suffer a financial loss if the insured item is damaged or destroyed.</p> Signup and view all the answers

<ol> <li>The insured item must be something capable of being insured (a property or asset).</li> <li>The insured must have a valid claim on the property.</li> <li>The insured must be able to suffer a financial loss if the insured item is damaged or destroyed.</li> </ol> Signup and view all the answers

<p>An insurance claim is a formal request made to an insurance company for payment based on the terms of the insurance policy.</p> Signup and view all the answers

<p>An insurance policy acts as a legal contract outlining the terms of the agreement between the insurer and the insured (policyholder), specifying the coverage provided and the obligations of both parties.</p> Signup and view all the answers

<p>Life and personal accident insurance policies are not based on the principle of indemnity because they do not aim to restore the insured to their previous financial position. Instead, they provide a fixed sum payment upon the occurrence of a specific event, such as death or disability.</p> Signup and view all the answers

<p>Insurable interest ensures that only those individuals with a direct connection to the insured asset will benefit from the insurance policy. This prevents individuals from profiting from the insurance of properties or assets they do not have a legitimate interest in.</p> Signup and view all the answers

<p>A homeowner buying insurance for their house. Since the homeowner has a financial interest in their home, they qualify for coverage. The insurance policy would protect them financially if their home was damaged or destroyed.</p> Signup and view all the answers

<p>The two main types of life assurance policies are whole-life policies and endowment policies.</p> Signup and view all the answers

<p>A whole-life policy pays out on death, while an endowment policy pays out upon death or at a fixed date.</p> Signup and view all the answers

<p>A with-profits policy increases the sum assured by a proportion of the insurer's profits, while a without-profits policy only provides the guaranteed sum.</p> Signup and view all the answers

<p>Endowment policies are the most expensive because they provide the greatest cover, paying out upon death or at a fixed date, while whole-life policies only pay out upon death.</p> Signup and view all the answers

<p>The key benefit of a whole-life policy is that it provides cover for the lifetime of the insured, ensuring their family's financial well-being upon their death.</p> Signup and view all the answers

<p>A 'premium' is the regular payment made by the insured person to maintain their life assurance policy. It is determined by factors such as the age of the insured, their health, and the type and amount of cover they choose.</p> Signup and view all the answers

<p>A broker is a middleman who represents the insured person and helps them find the best insurance policy, while an insurance company is the entity that provides the insurance coverage.</p> Signup and view all the answers

<p>A whole-life policy would be suitable for an individual who wants to ensure financial stability for their family after they pass away. For example, a young parent could choose a whole-life policy to provide for their children and spouse in case of their untimely death.</p> Signup and view all the answers

<p>It allows the insurance company to recover costs from the party responsible for the loss after compensating the insured.</p> Signup and view all the answers

<p>Proximate cause identifies the main reason behind a loss, determining if the loss is covered by the insured's policy.</p> Signup and view all the answers

<p>Contribution is the principle where multiple insurers share the cost of a claim for the same risk, ensuring fair payment by each.</p> Signup and view all the answers

<p>Utmost good faith requires both the insured and insurer to disclose all relevant facts affecting the policy and its risks.</p> Signup and view all the answers

<p>It allows them to recoup expenses from responsible parties, which helps to keep insurance premiums lower for all policyholders.</p> Signup and view all the answers

<p>Contribution applies when multiple insurance policies cover the same insured risk and a loss occurs.</p> Signup and view all the answers

<p>The insurance contract may be voided if any party misrepresents relevant facts during the agreement.</p> Signup and view all the answers

<p>Insurers assess the proximate cause to evaluate if the loss aligns with the conditions outlined in the insurance policy.</p> Signup and view all the answers

<p>It provides financial support to cover funeral costs, living expenses, and any outstanding debts.</p> Signup and view all the answers

<p>It covers risks related to losses from events like fire, flood, or damage to buildings and equipment.</p> Signup and view all the answers

<p>The insurer is the financial institution that sells the insurance policy.</p> Signup and view all the answers

<p>The sum insured is the maximum amount of compensation that can be claimed under a policy.</p> Signup and view all the answers

<p>Insurance compensates for losses to cargo and provides certainty, encouraging traders to send goods over long distances.</p> Signup and view all the answers

<p>Fidelity guarantee is one type of coverage offered to protect against employee dishonesty.</p> Signup and view all the answers

<p>Insurance can protect against the loss of property due to incidents like fire or flood.</p> Signup and view all the answers

<p>A life assurance policy creates an estate that can be passed on to relatives upon the insured's death.</p> Signup and view all the answers

A contract providing financial protection against loss or damage.

Regular payment made to an insurance company for coverage.

The likelihood of an event occurring that could cause loss.

Gathering funds from many to compensate those who suffer losses.

Compensation for loss or injury to restore the original state.

A type of insurance guaranteeing payment upon specific events like death.

Agreement where the insurer pays compensation for losses incurred.

Payment made to restore someone to their original condition after loss.

A policy that restores the insured to their pre-loss position, not allowing profit.

A formal request to an insurance company for payment based on a policy.

A legal contract between insurer and insured detailing payment obligations.

A principle stating that the insured must have a financial connection to the property or life insured.

Conditions that must be met for someone to have insurable interest.

The insured's right to the insured item or asset that is covered.

The potential loss one could face due to damage to an insured item.

The requirement of a financial or personal stake in the insured item.

The required legal connection between the insured and the subject matter.

The right of insurers to seek reimbursement from the responsible party after paying for a loss.

The primary event that led to a loss or damage covered by an insurance policy.

When multiple insurance policies share the costs of the same claim for the same insured.

A principle requiring both parties to disclose all relevant information affecting the insurance policy.

Providing false information in the insurance contract, violating good faith obligations.

The process where different insurance companies share the payout responsibilities for a single loss event.

The obligation of a party deemed at fault to compensate for damages they caused.

Insurance that provides financial support to beneficiaries upon death.

The insurance company that sells policies to protect against risks.

The person whose interests are protected by an insurance policy.

The maximum amount payable under an insurance policy.

Insurance that protects businesses from risks like fire and theft.

Insurance protecting against employee dishonesty or fraud.

Covers loss or damage of ships, cargo, and terminals.

Provides risk protection, capital source, and estate creation.

A businessman who buys or sells for another for a commission.

A life assurance policy with a fixed sum paid on the death of the insured, requiring lifetime premiums.

A life assurance policy paying either on death or after a set time, can be surrendered for cash.

A temporary life assurance covering the insured for a specific term with no cash value at maturity.

A policy that increases the sum assured by a share of the insurer's profits from investments.

A non-profit policy that guarantees a fixed sum without profit sharing, payable upon death or policy end.