Importance and Types of Insurance: Life, Fire & Marine Insurance (For CBSE, ICSE, IAS, NET, NRA 2022)

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Importance of Insurance

To appreciate the importance of insurance, discuss the benefits of insurance,

  • Insurance serves as a very useful means of spreading the effects of personal as well as business risks by way of loss or damage among many. Thus, the insured have a sense of security. Individuals who pay premium periodically out of current income can look forward to an assurance of receiving a fixed amount on retirement or his family being secured in the event of his death. Businessmen pay premium for insurance of risk of loss without constant worry about the possibility of loss or damage.
  • Insurance plays a significant role particularly in view of the large-scale production and distribution of goods in national and international market. It is an aid to both trading and industrial enterprises, which involve huge investments in properties and plants as well as inventories of raw materials, components and finished goods. The members of business community feel secured by means of insurance as they get assurance that by contributing a token amount, they will be compensated against a loss that may take place in future.
  • From the national economic point of view, insurance enables savings of individuals to accumulate with the insurance companies by way of premium received. These funds are invested in securities issued by big companies as well as by Government.
  • Individuals who ensure their lives to cover the risks of old age and death are induced to save a part of their current income, which is by itself of great importance.
  • Insurance is a source of employment for the people. The people get employed directly in its offices of the insurance company spread over the country and it also provides opportunities to the people to earn their livelihood by working as agent of the insurance companies.

Types of Insurance

Insurance, which is based on a contract, may be broadly classified into the following types.

Types of Insurance

Life Insurance Corporation of India (LIC) and General Insurance Corporation with its subsidiaries happened to be the only organizations engaged in life and general insurance business in India. Now a number of other private companies have entered this service sector. Consider the salient feature of each of these types.

Life Insurance

A contract of life insurance (also known as ‘life assurance’ ) is a contract whereby the insurer undertakes to pay a certain sum either on the death of the insured or on the expiry of a certain number of years. Life insurance is also referred to as life assurance. The written form of contract is known as life insurance policy. It provides for the payment of a fixed sum to the insured or his legal heirs as the case may be either on a fixed date or on the happening of an event, which is certain. In return, the insured agrees to pay an amount as premium either in a lump sum or in periodical instalments, annually, half-yearly, quarterly or monthly. The risk insured against in this case is certain to happen. Businessmen can provide for life insurance of all their employees by way of group insurance. It develops loyalty among employees and can be used as a security for raising loans.

There are two basic types of life assurance policies

  • Whole-life policy, and
  • Endowment Policy.

A whole life policy runs for the whole life of the insured and premium is payable all along. The sum assured becomes due for payment to the heirs of the insured only after his death. An endowment policy on the other hand, runs for a limited period or up to a certain age of the insured. The sum assured becomes due for payment at the end of the specified period or on the death of the insured, if it occurs earlier.

Fire Insurance

A contract of fire insurance is a contract whereby the insurer, on payment of premium by the insured, undertakes to compensate the insured for the loss or damage suffered by reason of certain defined subject matter being damaged or destroyed by fire. It is a contract of indemnity, that is, the insured cannot claim anything more than the value of property lost or damaged by fire or the amount of policy, whichever is lower. The claim for loss by fire is payable subject to two conditions, via;

  • there must have been actual fire; and
  • fire must have been accidental, not intentional;

The cause of fire being immaterial. The basic principle applied with regard to claim is the principle of indemnity. The insured is entitled to be compensated for the amount of actual loss suffered subject to a maximum amount for which he had taken the policy. For example, if a person takes a fire insurance policy of ₹ 20,000/- on certain goods. Out of these, goods worth ₹ 15,000/- are destroyed by fire. The insured can only claim an amount to the extent of loss i.e.. , ₹ 15,000/- (and not ₹ 20,000/-) for the damage from the insurance company. He cannot make a profit through insurance.

Marine Insurance

  • Marine insurance is an agreement (contract) by which the insurance company (also known as underwriter) agrees to indemnify the owner of a ship or cargo against risks, which are incidental to marine adventures. All marine insurance contracts are contracts of indemnity. It includes insurance of the risk of loss of freight due on the cargo.
  • Marine insurance that covers the risk of loss of cargo by storm is known as Cargo insurance.
  • The owner of the ship may insure it against loss on account of perils of the sea. When the ship is the subject matter of insurance, it is known as Hull insurance.
  • Where freight is payable by the owner of cargo on safe delivery at the port of destination, the shipping company may ensure the risk of loss of freight if the cargo is damaged or lost. Such a marine insurance is known as Freight insurance.
  • The followings are the different types of marine insurance policies

Time Policy

This policy insures the subject matter for specified period of time, usually for one year. It is generally used for hull insurance or for cargo when small quantities are insured.

Voyage Policy

This is intended for a particular voyage, without any consideration for time. It is used mostly for cargo insurance.

Mixed Policy

Under this policy the subject matter (for example, hull) is insured on a particular voyage for a specified period of time. Thus, a ship may be insured for a voyage between Mumbai and Colombo for a period of 6 months under a mixed policy.

Floating Policy

Under this policy, a cargo policy may be taken for a round sum and whenever some cargo is shipped the insurance company declares its value and the total value of the policy is reduced by that amount. Such shipments may continue until the total value of the policy is exhausted.

Other Insurance

Other types of insurance such as burglary insurance, motor vehicle insurance, etc.

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