Insurance is contracts signed for a certain time between a person or company with a company that, in exchange for receiving a monthly premium from the former, undertakes to pay monetary compensation if it suffers an accident, theft or some type of damage to its facilities and equipment before the previously stipulated period of time has elapsed.
Among the main characteristics of insurance, we have that can be hired by a person, but also by groups of individuals or companies of any size. In addition, there is no other limit for the amount of insurance that can be contracted except for the one that puts the insured’s economic capacity.
Another feature of insurance is that they can cover a wide variety of situations, such as life insurance or personal injury insurance, light vehicle, heavy and motorcycle insurance; insurance against fire or natural disaster damage; insurance against theft, etc.
Although their specific functions differ, the characteristics of the insurance are similar in all cases and contract varieties.
In general, insurance companies receive their profit when there is no accident that forces them to pay the compensation stipulated in the contract.
For this reason, they usually demand severe conditions from the insured, such as being in good health (for life insurance) or having an adequate fire or anti-theft equipment, in the case of homes, companies or vehicles, among others.
At an economic and legal level, insurance is considered a very valuable tool to manage the financial risk involved in operating a company or having expensive properties.
We will review what are the characteristics of insurance and what distinguish them from other types of contracts.
What are the parties involved in an insurance contract?
Insurance always involves two parties, called the insurer and the insured. The latter is also called the policyholder.
An insurer is a person or company that grants the insurance, while the insured is a person or group that acquires coverage.
As in any other type of commercial contract signed in the modern world, in the process of acquiring or contracting an insurance policy, there are also people who act as intermediaries.
In this case, the figure of the insurance broker is common , who is a person who acts as a representative of the insurance company and has the function both of attracting new clients for the insurance portfolio of said company, and of helping the insured client to process the compensation to which you might be entitled when a contingency stipulated in the contract occurs.
In this case, the insurance broker is the visible face of the company before the public it is going to attend and is the first person the client will go to when a situation arises for which it is covered by the acquired policy.
They are good faith contracts
According to Kennet Black and Harold Skipper in their book “Life & Health Insurance“, insurance is a good faith contract that requires a high degree of honesty from both parties, insured and insurer.
In legal terms, this implies that each party is expected to act in the best way to avoid taking advantage of the other. Both the insured and the insurer have the obligation to disclose information and material facts that positively or negatively affect the other.
Being a good faith contract, the insurer relies solely on the statements of the insured when evaluating the acceptance of the coverage, and the insured relies solely on the good faith of the insurer to grant it the best risk coverage.
Insurance always involves compensation
Insurance is indemnity contracts, which means that financial responsibilities will be divided between both parties. Compensation is a legal act in which one party is protected against certain costs or risks when transferring them to the other party.
They are based on premium payments
An insurance company provides coverage only against payment of a fee, called an insurance premium. In addition, the insurance contracted will have a specific term, which can be from a few months to several years as agreed between the parties.
Like any other commercial contract, obligations and reciprocal rights for the insurer and the insured are stated here. Whoever purchases insurance expects to always have economic protection against damage or loss of their property.
You can even take out insurance against the cessation of profit (unexpected or unjustified unemployment) and for the loss of life. In the latter case, the benefit will go to the relatives of the deceased or to whom he has designated as a beneficiary of the policy.
For its part, the insurer expects to obtain profits through the monthly premiums charged by the insurance policy sold, so the payment of the premiums will always be the first priority for both parties if it is desired that the contract remains in force in all its terms.
It is noteworthy that because the premium is the amount charged by the insurer to grant the risk coverage, the price of these will rise or fall according to the policies of the insurance company and the fulfilment or not of certain conditions by the interested party in the policy.
For example, when contracting life insurance, the insurance company will make an evaluation of the beneficiary’s physical condition, which will include parameters such as his age, general physical condition; presence of degenerative diseases or cancer; history of family diseases such as diabetes, heart attacks or inherited ailments; occupational occupation (and risks it has); eating habits and potential vices such as smoking or excessive drinking, among many others.
The amount of the premium required by the insurer to the client will then depend on this evaluation. Younger and healthier people will always pay much lower premiums than older adults or those who have had diseases such as cancer or disabling accidents in whole or in part.
In addition, these premiums may vary when insurance is renewed due to the expiration of the time for which it was contracted. For example, someone insures your new vehicle and pays $ 200 per month for insurance against theft or damage for a period of 5 years. By renewing this insurance at the end of those 5 years the insurer will put more demanding conditions because it is a vehicle that is no longer new and will be more prone to damage.
In this case, one option is to accept insurance with lower premiums, but that will also have lower coverage.
Insurance is based on randomness
As author Brian Breuel explains in his book “The Complete Idiot’s Guide to Buying Insurance and Annuities”, insurance contracts are random, which means that they depend on the probability and future events, whose certainty is undetermined.
Policyholders pay regular premiums regardless of whether or not the events that would lead to receiving compensation payment occurs. For example, someone pays insurance against theft for their home for 10 years, without knowing if they will ever be the victim (or not) of a theft.
In all cases, the insured must always see the insurance policy as what it really is, a tool to reduce or cover losses only if an eventuality occurs.