What is Insurance? Definition, Pri12nciples, Types, and Benefits in Life

In everyday life, humans are constantly faced with various unpredictable risks. These 12risks can include accidents, illness, loss of property, and other unforeseen events. To mitigate the financial impact of these risks, a protection system known as insurance was created . Insurance has become a crucial instrument in modern financial planning, for both individuals and companies.

Definition of Insurance

Insurance is an agreement between two parties : the insurer (the insurance company) and the insured (the customer), in which the insurer provides financial protection against certain risks experienced by the insured. In return, the insured pays a sum of money called a premium periodically or according to an agreed-upon rate.

The primary purpose of insurance is to provide a sense of security and financial protection in the event of a devastating event. With insurance, the burden of a large loss can be shifted into smaller, more manageable expenses.

A Brief History of Insurance

The concept of insurance has actually existed since ancient times. During the maritime trade era, merchants shared the risk of losses due to shipwrecks or lost goods. Over time, this system evolved into a more structured and legally regulated insurance institution.

In the modern era, insurance is developing rapidly and covers various aspects of life, from health, education, vehicles, to business.

Basic Principles of Insurance

Insurance is run based on several basic principles that are important to understand, including:

1. Utmost Good Faith Principle
   Both parties must provide honest and complete information regarding the insured object.

2. Insurable Interest Principle
   The insured must have an interest in the insured object in order to file a claim.

3. The principle of indemnity is
   that insurance aims to restore the insured's financial condition to the state it was in before the loss occurred, not to seek profit.

4. Proximate Cause Principle
   Claims can only be paid if the loss is caused by a risk covered by the policy.

5. Principle of Subrogation
   After paying a claim, the insurance company has the right to sue the third party who caused the loss.

Insurance Functions

Insurance has several important functions in people's lives, including:

• Financial Protection
  Reduces the burden of costs due to unexpected risks.

• Risk Management
  Helps individuals and companies transfer major risks to insurance companies.

• Financial Planning
  Provides certainty and stability in managing long-term finances.

• Increased Sense of Security
  Provides peace of mind because risks have been prepared for in advance.

Types of Insurance

Insurance comes in various forms to suit people's needs. Here are some commonly known types:

1. Life Insurance

Life insurance provides financial protection to the family or heirs in the event of the insured's death. This type is often used as long-term protection.

2. Health Insurance

Health insurance covers the costs of medical treatment resulting from illness or accident. This insurance can help manage high healthcare costs.

3. Vehicle Insurance

Vehicle insurance protects the owner from losses due to damage or loss of the vehicle.

4. Property Insurance

This insurance provides protection for homes or buildings from risks such as fire, flood, or certain natural disasters.

5. Education Insurance

Education insurance is designed to help prepare funds for children's future education.

Benefits of Insurance for Individuals and Society

Insurance provides many benefits, not only for individuals but also for society at large:

1. Reducing Personal Financial Risks
   Major losses can be mitigated without drastically disrupting financial conditions.

2. Improving Financial Discipline
   Regular premium payments foster savings and planning habits.

3. Supporting Economic Stability
   Insurance helps maintain economic stability by reducing the financial impact of major risks.

4. Providing Long-Term Protection
   Insurance can be part of a family's future protection strategy.

How Insurance Works

The way insurance works is relatively simple. Customers choose an insurance product based on their needs and pay a premium. If a risk covered by the policy occurs, they can file a claim with the insurance company. After verification, the company will provide compensation according to the policy terms.

An insurance policy is an important document that contains the rights and obligations of both parties, so it must be understood well before agreeing to the agreement.

Challenges and Misconceptions about Insurance

Despite its benefits, many people still don't fully understand insurance. Common misconceptions include the assumption that insurance is expensive, difficult to claim, or unnecessary if you're feeling healthy.

In fact, insurance is designed to address unpredictable risks. Proper education and understanding are key to ensuring people can utilize insurance optimally.

The Role of Insurance in the Modern Era

In the modern era, insurance serves not only as a means of protection but also as part of the financial system and economic development. Insurance companies play a role in collecting public funds and channeling them into productive sectors through investment.

Digitalization also facilitates easy access to insurance, from registration to claims, which can be processed online.

Conclusion

Insurance is a financial protection system designed to help individuals and businesses cope with life's risks. Based on the principle of risk sharing, insurance provides security, financial stability, and long-term support.

Understanding insurance is a crucial step in wise financial planning. By choosing an insurance product that suits your needs and understanding the policy terms, insurance can be an effective solution for facing future uncertainty.