What is Insurance? - Types & Benefits
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What is Insurance?
The future is always uncertain and unpredictable. Certain unforeseen events may have a devastating impact on individuals and businesses. Insurance is a risk management mechanism that helps you cover the financial losses due to accidents, natural calamities, legal claims, property damage, bodily injury, and death of individuals.
What is Shariah-compliant insurance in the UAE?
Shariah-compliant insurance is also known as Takaful insurance. It operates on the concept of cooperation and shared responsibility among policyholders who become members of a common fund. Any member who incurs a loss shall be compensated by this fund. The surplus (if any) is distributed amongst the participants as per Shariah principles.
How Does Insurance Work?
Insurance is a method of protecting yourself against financial losses due to risky and uncertain events. You can purchase an insurance policy by paying a fixed premium for a policy period. The insurance company undertakes to compensate you for the insured event under the terms & conditions of the policy.
The insurer collects money from several policyholders and pools it to pay for the losses of a few people during the period. Insurance works on the premise that only a small percentage of policyholders incur losses and make claims during a specific period. The insurer fixes the premium based on the probability of occurrence of a risky event and the sum insured (i.e., the amount of insurance coverage).
Components of Insurance
Premium
The price (or the cost) of an insurance policy is referred to as ‘premium.’ An insurance company fixes the premium for a policy period, which is usually one year. The premiums can be paid at monthly, quarterly, half-yearly, or annual frequencies. The insurer fixes the premium based on several factors, such as risk perception, value, and track record of past claims. Higher insurance coverage typically entails higher premiums.
Policy Limit
The maximum compensation an insurer is liable to pay under an insurance policy is referred to as the ‘policy limit.’ This limit is generally applicable to health and other general insurance policies. Life insurance policies pay out a predetermined sum in the event of the policyholder’s death or at maturity.
The insurer may set the limit for a period, event, or over the policy’s lifetime.
Deductible
The concept of deductible is generally applicable to health insurance policies. A deductible is the fixed sum you must pay out of pocket before the insurer covers the loss. The insurance company accepts and settles the claim only if it exceeds the deductible.
A deductible of AED 2,000 in a policy means that any loss or expense up to AED 2,000 has to be borne by the policyholder. The insurer steps in and covers the expense only if it is more than AED 2,000. Deductibles help the insurer to check small or frivolous claims. A policy with a higher deductible is relatively cheaper as it reduces minor claims.
Why Insurance is Important?
A comprehensive insurance policy is a great investment for individuals and businesses alike. Insurance provides financial protection to safeguard you against untoward events in the future. Accidents, injuries, natural calamities, theft, or third-party legal claims can cause huge difficulties and monetary losses. Insurance offers compensation to mitigate the financial impact of events beyond your control.
The untimely demise of a family’s breadwinner causes immense pain and hardships to the dependants. Though the emotional void cannot be filled, the family’s financial distress can be alleviated by insurance. To sum it up, an insurance policy protects you against unexpected losses or expenses and offers peace of mind to every policyholder.
What are the Types of Insurance?
These two categories can be further divided into several types, as outlined in the table below:
| Life Insurance | General Insurance |
|---|---|
| Term Plan | Health Insurance |
| Endowment Plan | Auto Insurance |
| Money Back Plan | Property Insurance |
| Unit Linked Insurance Plan | Travel Insurance |
| Children’s Plan | Liability Insurance |
| Retirement Plan | Marine insurance |
What is General Insurance?
What are the Types of General Insurance?
Health Insurance :
This policy covers all your medical expenses by paying for hospitalization, treatment, medicine, and consulting charges
Motor Insurance :
Any loss or damage to your vehicle due to accidents is covered by motor insurance. This policy also covers third-party claims arising due to accidents.
Property Insurance :
Any loss or damage to your residential or commercial property due to natural disasters, fire, theft, vandalism, etc., is covered under property insurance.
Travel Insurance :
Any unexpected loss or expense during foreign travel, such as medical emergency, trip cancellation, flight delays, theft, or lost baggage, shall be covered by travel insurance.
Liability Insurance :
Third-party claims may arise if your actions cause bodily injuries to other people or damage their properties. Liability insurance offers compensation to cover such losses.
Business Insurance:
A business insurance policy offers comprehensive coverage to protect your company’s physical property, financial assets, and intellectual property. You can also cover other risks such as lawsuits, worker’s compensation due to accidents, and loss of income due to business interruption.
Marine Insurance :
A marine insurance policy protects goods in transit by sea from the port of origin till the final destination port. The policy also covers physical damage to the vessel and the owner’s legal liabilities
Benefits of General Insurance
Health insurance covers all your medical expenses and enables access to the best healthcare facilities at a reasonable cost. Further, every person in the UAE must have health insurance as per law.
Other general insurance policies protect your valuable assets (such as your home, vehicles, business, jewelry, etc) from loss or damage. The insurer compensates the policyholder for the loss and prevents financial hardships.
Liability insurance protects you from lengthy & expensive lawsuits by covering legal fees and third-party claims.
Lenders, clients, and other stakeholders may insist upon insurance coverage in their legal agreements.
Insurance mitigates the impact of risky events, provides financial security, and offers peace of mind to policyholders.
What is Life Insurance?
The sum assured or the death benefits of a life insurance policy are payable only to the beneficiaries after the policyholder’s death. However, several variants of life insurance now provide the dual benefits of insurance and savings. Apart from death benefits, these policies offer guaranteed payouts to policyholders who survive the policy term.
What are the Types of Life Insurance?
Term Plan :
A term insurance plan offers only death benefits to the beneficiaries of deceased policyholders. There are no other payouts, and the premiums are the lowest among all life insurance plans.
Whole Life Policy :
This type of policy offers life insurance coverage for 100 years or the entire life of the policyholder. The policy remains valid as long as you pay the premiums on time.
Endowment Plan :
An endowment plan provides both death benefits and investment returns. The policy pays a fixed sum if the policyholder dies during the policy term. In case he survives the term, he is eligible to receive guaranteed benefits upon maturity.
Money Back Plan :
A money-back policy offers fixed lump sum benefits at predetermined intervals during the policy term
Unit Linked Insurance Plan (ULIP) :
A ULIP is a combination of life insurance and mutual fund. A fixed portion of the premium is utilized to provide life coverage, and the balance is invested in equity/debt markets to generate higher returns.
Children’s Plan:
Parents can purchase a child plan to safeguard their children’s future. The insurance company pays a fixed sum to the child’s benefit in the event of the parent’s death.
Retirement Plan :
A retirement plan helps you build a retirement corpus by making regular contributions during your working years. The benefits received at maturity can be reinvested to generate regular post-retirement income.
Benefits of Life Insurance
Life insurance provides financial security to the family members of a policyholder in the event of his/her untimely demise.
Term insurance plans offer high death benefits to beneficiaries in return for very low premiums.
The savings plan of life insurance policies enables you to invest regularly and achieve your financial goals by inculcating financial discipline.
Annuity-based life insurance plans offer a fixed monthly payout after retirement when people may not have a regular source of income.
How to Compare Insurance?
When you compare two or more insurance companies, you must observe their financial strength, business size, operational metrics, and claims settlement figures. A company with strong financials and a good track of claims settlement should be your obvious choice.
You can compare the insurance policies by studying their features, benefits, inclusions, exclusions, and prices. The best choice is an insurance plan that fulfills your needs and requirements at a comfortable price point. Although insurance coverage is critical, the cost must provide optimal value for money without imposing a financial burden on policyholders.
Frequently Asked Questions on the Insurance
Life insurance covers life or the risk of untimely death of a person. General insurance covers health and the risk of loss or damage to properties & assets. General insurance is also known as non-life insurance.
The insurance policy premium depends on factors such as the risk (probability of an event), coverage amount, and insurance policy type. Other specific factors include age, occupation, region, and past claims history.
A cashless facility is a distinct feature of health insurance policies. A group of clinics and hospitals enter into a tie-up with an insurance company. Policyholders can avail of treatments within this network by not paying for expenses from their pockets. The medical bills are directly settled by the insurer.
The principle of indemnity in insurance states that an insurance policy should compensate the policyholder only to the extent of damage or loss incurred. The policyholder cannot aim to make any profit out of an insurance contract by claiming more than the actual amount of loss. Most general insurance contracts are based on the principle of indemnity.
The different types of health insurance in the UAE are as follows:
- Basic Health Insurance: This policy covers all medical treatment expenses incurred toward illness or injury. Both individuals and families are covered under this policy
- Comprehensive Health Insurance: This policy provides extensive medical coverage and covers pre & post-hospitalization expenses. This includes in-patient & outpatient treatment, surgery, doctor’s consultations, medicines, and diagnostic procedures
- Shariah-Compliant Health Insurance: This type of health insurance is designed based on the principles of the Islamic religion. Several members contribute to building a large corpus. The claim of any member is paid out of this fund
- Health Insurance With Direct Access to Hospitals: This policy offers cashless treatment to policyholders at network hospitals. The medical bills are directly settled by the insurer to the concerned hospital
The two types of car insurance in the UAE are as follows:
- Third-Party Liability Insurance: This policy protects car owners against third-party claims arising from an accident. Bodily injuries to third parties or damage to their property results in legal claims and related costs. Such expenses will be covered under third-party liability insurance
- Comprehensive Car Insurance: This policy covers third-party claims, own-vehicle damage, and loss due to theft/burglary/vandalism
