Understanding Insurance

We all are familiar with the term INSURANCE but very few clearly know what it means, how it works & what exactly is its use. So, let’s understand all these aspects of Insurance.


Insurance is an legal arrangement by which a company undertakes to provide a guarantee of compensation for specified significant loss, measurable in monetary terms, in return for payment of a specified premium, payable at regular intervals. Hence, insurance is –

  • a precaution or preparing in advance, for unfriendly future situations of life.
  • a way of protecting ourselves against sudden significant losses, which may otherwise affect us adversely.
  • Sudden significant losses are covered against the payment of regular small amounts called Premium.
  • a contract, between the Insured & the Insurer to cover the specified Events in exchange of timely periodic Payments.

In India, insurance is governed by the Indian Contract Act 1872.

How does INSURANCE works ?

INSURANCE distributes our sudden losses over a long period of time.

  • Insured person has to pay regular Premium over the Policy Tenure whereas the payout in case of a mishappening is always paid lump sum upto the Sum Assured.

INSURANCE does not minimizes or stops/ends our losses but compensates us for them.

  • Mishappenings can be avoided to some extent but they can’t be stopped. It’s here that Insurance compensates the insured for the risk cover opted in lieu of the regular premium.

INSURANCE distributes losses of a person among a large group of people facing a common risk.

  • Insurance works on the principle of quantity. A large group of people who face similar risk are grouped together. As all insured will not incur the losses at a particular time hence insurer compensates as & when any of the insured requires from that vast pool of funds.

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