Insurance is a means of providing protection against financial loss in a great variety of situations. For example, life insurance (L.I) helps replace income lost to a family if a wage earning parent dies. Health insurance (H.I) helps pay medical bills. Fire insurance pays all or part of the loss if a homeowner’s house is destroyed by fire. People can also buy insurance to cover unusual types of financial losses. Insurance works on the principle of sharing losses. People who wish to insured against particular types of losses agree to make regular payments called premiums, to an insurance company. In return, these people receive a contract, called a policy, from the company.
The amount of money paid by the insurance company to the policyholders is known as the benefit or the claim. The insurance company uses the premiums to invest in stocks, bonds, mortgages, government securities, and other income producing enterprises. The company pays benefits from the premiums it collects and the investment income the premiums earn. Insurance works because policyholders are willing to trade a small, certain loss – the premiums – for the guarantee that they will be paid in case of a larger loss. They can therefore own property, drive a car, operate a business, and engage in other activities without worrying about the financial that might occur.
There are three main types of L.I. Term L.I, whole L.I and endowment L.I. Most L.I companies sell policies that combine these basic types of insurance. Term life insurance provides benefits only if the insured person dies within the period covered by the policy. Whole life insurance provides coverage for the life-time of the person insured. Endowment life insurance like other life insurance, pays the face value on the death of the insured person. But endowment is chiefly a means of saving money. Policy holders often use endowment policies to finance the education their children.
Health insurance pays all or part of the cost of hospitalization, surgery, laboratory tests, medicines and other medical care. The rising cost of medical care has increased the need for adequate health insurance. People without such coverage could face major financial hardship in case of a serious illness or accident. Private health insurers sell individual and group policies. Most people with individual health insurance are covered under a group plan where they work. Group plans may also cover the insured person’s dependents. Group health insurance generally costs less than individual coverage because administrative costs and other expenses are lower.
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Individual health insurance is offered mainly by insurance companies, medical service plans, health maintenance organizations and employers. Many insurance companies that sell health insurance policies provide cash benefits to the insured person. A cash benefit is a fixed amount for each medical expense or day of hospitalization. If the cash benefits do not cover the entire cost of medical care, the policy holder must pay the balance. Individual health insurers offer four main types of health insurance. They are hospital expense insurance, surgical expense insurance, outpatient expense insurance and major medical expense insurance. Each has a different benefit coverage.
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