Nature of Insurance

Insurance is one of the several tools we use for risk management. Having insurance coverage can help you reduce financial losses in case of unexpected events or illness. However, insurance cannot prevent accidents from happening. Having insurance coverage does not lower the chance of an accident, it only prevents or lowers losses due to accidents. In essence, having insurance coverage is to pay a small cost upfront in exchange for not having to pay for a potential substantial loss in the future.

Types of Insurance

For personal financial planning, insurance can be classified into the following categories:

Coverage provided by insurance policy can be inclusive or exclusive. An inclusive coverage is that when those conditions stated in the insurance policy are met then indemnity is made. For example, critial illness insurance that covers only heart disease only pay out to the policyholder when he/she is diagnosed with heart-related disease but not others. An insurance policy with exclusive conditions is that when certain conditions (exclusions) are met, the insurer is exempted from any liability to any losses. An example for exclusion is travel insurance. Most travel insurances have an exclusion of war, i.e., even you have purchased a travel insurance, but if you travel to a war zone, you will not get any protection against any financial losses.

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