What
is insurance?
Insurance is the transfer of risk by an individual or organisation, known
as the policy owner, to the insurance company. In return, the insurance
company receives payment in the form of premium. In the event of loss suffered
by the policy owner, the insurance company will compensate for the loss
or damage.
Basic
principles of insurance
The four main principles of insurance are:
Insurable
interest
You would have an interest in the insured item or life such that, a loss
or damage to the item or life insured, would result in a financial loss
to you. For example, if you have sold your car, you should also stop insuring
it because you no longer have any insurable interest. If you continue
to insure it, the insurance company will not pay you in the event of loss
or damage to the car.
Utmost
good faith
An insurance contract is a contract of utmost good faith. You, as the
policy owner, must disclose all material facts when buying a policy. If
you fail to disclose any material fact, the policy may become invalid.
Indemnity
Only applies to the physical damage to a property (e.g. damage to a building
or motor vehicle) where the loss can be quantified in monetary terms.
You cannot ‘profit’ from an insurance policy. In the event that
you suffer a loss, the insurance company will pay or ‘indemnity’
you to the position you were in before the loss.
Contribution
It is not necessary to buy more than one policy to protect a particular
property. If you do buy more than one, in the event of loss or damage
to the property, you can only make one claim. The amount payable will
then be contributed by the insurance companies involved. However, if you
wish to cover your life, you can buy more than one policy.
Types
of insurance
There are two main types of insurance i.e. life and general insurance:
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