Human life is characterized by risks and uncertainties- none knows what tomorrow holds. These uncertainties come along with (or cause) losses. And therefore people have always searched for security and protection from these losses and contingencies.
Insurance has evolved as one of the most important ways to provide this security.
Insurance offers protection against a financial loss. It is one of the main methods used in handling risks. It’s a financial arrangement that redistributes the cost of unexpected losses. It involves the transfer of potential losses (of individuals) to an insurance pool from which the exposed few are compensated. That is, the financial consequences of an event are transferred from the insured(s) to the insurance companies.
What is an insurance policy?
An insurance company and the insured get into a legal contract called the insurance policy. The insurance policy is a document that details the conditions and circumstances under which the insurance company will compensate the insured person(s) or the nominees in case the insured risk occurs.
The insured pays the premiums and the insurance company promises to pay the insured when incurs a financial loss arising from the insured risk.
Any individual, organization or a company can seek insurance from an insurance company against any imaginable risk. However, whether to provide insurance or not, is at the discretion of the insurance company. Insurance companies can refuse to provide insurance to high-risk applicants. But they have to keenly evaluate the claim application form before making any decision.
For example, all who owns motor vehicles are prone to road accidents. And when the accidents occur, their vehicles could be damaged or through those accidents, a third party property might get destroyed or even injuries to a pedestrian sustained. In case of such events, the owner of the involved motor vehicle will incur a loss. He will be required to repair his vehicle. Also if the third party is involved, he will be held liable to pay for the loss incurred. This might involve repairing the third party motor vehicle or footing the bill in case of injuries.
And this is where the insurance comes in to insure these risks so that when loss causing events (fire, accident…) occur, the party involved is restored back to his original financial status.
What is Risk?
Risk refers to danger an individual is exposed to. It is the chance that unfavourable event(s) will occur in an uncertain future. In insurance, a risk is also called peril. And the peril is the primary cause of the loss. For example, accident, theft, sickness, floods, earthquake etc.
There are the conditions which create or increase the chance of the loss occurring from a given peril called hazards. They are also the conditions that can make the loss more severe once the peril occurs.
There are two categories of hazards;
Moral hazards– these refer to the risks arising from the nature and behaviour of the insured towards the subject matter of insurance. Examples of moral hazards include;
- Exaggerating losses to benefit more from the insurance proceeds.
- Making fraudulent claims
- Withholding material facts.
- An insured’s carelessness.
Physical hazards– These refer to the physical characteristics that may create, increase or decrease the likelihood of an event. How the house is constructed, the material used, where it is constructed or its occupancy are examples of physical hazards.
Note: Not all risks are insurance risk, meaning, not all risks are insurable.
what is an insurance risk?
Insurance risk is a threat that is covered by an insurance policy and that can cause a financial loss. And in this care, when the event occurs and the insured filed a claim, the insurance company has to pay the insured (policyholder) the agreed amount.
But in Kenya, most peoples buy insurance policies just because it is a government’s requirement not even knowing what they are and also what are they for. And that’s why some even after the accident they do not report the matter to their insurers or even failing to lodge a claim.
Benefits of an insurance policy.
People always complain about how expensive insurance products are, but instead, they should look at the bigger picture and the whole essence of insurance. The following are some of the benefits realized in safeguarding your life with insurance.
Peace of Mind
This occurs when you know that your insurance policy covers you in case of a financial loss. And that insurance companies will meet all the financial consequences of their insurable risks. It encourages the insured individuals to live peacefully and to continue with their businesses without any fear. It makes them invest a lot compared to how they could have invested hadn’t their insurance.
As mentioned earlier, Insurance is a form of risk management in life. Uncertainties are a stumbling block to development in the sense that, due to the fear of the uncertainties people may not try to try new things in life. But with insurance, this fear is taken care of. The risk of falling sick, losing your car or having an accident, the risk of death among others, is effectively dealt with by an insurance policy.
Form of Savings
Some Life assurance policies facilitate savings through allocating funds in the form of premium every year. A person who saves their current income for the future well-being of their family ensures their prosperity. In some policies also the policyholder can reap the benefits by getting a lump sum.
Insurance encourages savings thus reducing your expenses in the long run. This can be seen in the event of the unfortunate events like medical ailments, accidents, loss of your house through fire among others, where the insurance chips in and take care of the expenses or restore you back to your normal life without having to hurt your pockets.
Life assurance policies offer financial protection to the dependents of the insured person in the event of their untimely death. This may be payable as a lump sum or as income. And this may go a long way in alleviating the financial consequences of one’s death.
Secure Future Goals
While alive you may not have a financial problem may be because you are salaried. But what about when you are gone?
For your family to be financially well doing even without you, a term insurance plan is the better option. It can be used to secure the future of one’s family. Buying a term insurance policy can help your nominee or dependent receive a lump sum or monthly payout to help them deal with their financial necessities.
Insurance plays a crucial role in the sustainable growth of an economy. It enables mitigation of losses thus promoting financial stability. And since the insurance policy is the contract itself that binds the insured and the insurance company together, it is equally important.
You need it, buddy!
Also, read>> Mobile Insurance.