Definition of insurance – Also known as insurance coverage or insurance policy, insurance is a legal agreement that binds two parties, namely the guarantor and the insured. In insurance, the insurer ensures financial coverage of losses that the insured may suffer under certain circumstances.
In more detail, what is the definition of insurance?
In the following, Sinaumedia’s article will discuss more broadly and deeply regarding the notion of insurance, its benefits, functions, features, and types. Let’s find out together, Matobers!
Definition of Insurance
According to the Big Indonesian Dictionary (KBBI) which can be accessed online, the notion of insurance is coverage between two parties, in which one party has the obligation to pay contributions, while the other party is obliged to provide full guarantees to the contribution payer if something happens to or related to the payer’s property, in accordance with the agreement that has been made.
Meanwhile, the official website of the Financial Services Authority (OJK) states that insurance is an agreement between an insurance company and a policyholder. This insurance is the basis for receiving premiums by the company in return for:
- Provide reimbursement to the policyholder or the insured for losses, damages, costs incurred, lost profits, or legal responsibility to third parties that may be suffered by the policyholder or the insured due to an uncertain event.
- Provide payment for the life or death of the insured with a predetermined amount of benefits or based on the results of fund management.
So, insurance or insurance coverage can be interpreted as a contract in the form of a financial protection policy. Meanwhile, this policy includes individual monetary risks due to unpredictable contingencies.
The insured is the policyholder, while the insurer is the company providing insurance. It is the insurer who provides coverage or reimbursement for many cases to the policyholder, depending on the agreement that has been made.
If Matobers has ever heard of the term “premium”, this is a certain amount that must be paid by the policyholder to the company that provides insurance protection. That way, the company or insurer will guarantee that it can bear the loss of the policyholder subject to the existing terms and conditions.
This amount of coverage is determined by the premium payment as the “policy limit”.
Introduction to Insurance Law
Legal Basis of Insurance
With the importance of insurance, of course there are legal rules that underlie it. Insurance is based on and regulated in Law Number 40 of 2014 (Insurance Law) in Indonesia. Previously, this law replaced Law Number 2 of 1992 concerning Insurance Businesses.
As for this latest law, there are 92 articles grouped into 18 written chapters.
Insurance Functions or Benefits
From the definition of insurance, of course we can understand implicitly that the function of insurance is a guarantee that provides protection for certain risks from the insurer for several people who are exposed to the risk and agrees to insure the risk.
Insurance also functions to provide guarantees against losses to the people who have been insured. Matobers, there are two main functions of insurance: primary and secondary. What do they mean?
The main function
The following are the main functions or benefits of insurance.
1. Providing Certainty
Insurance will provide certainty regarding payments and uncertainty about losses. The reason is, losses can be reduced by better administrative planning. So, insurance helps free policyholders from the difficult task of managing the extent of losses that can occur to something.
Risk itself is uncertain. When will it happen? Or maybe, it won’t happen at all. The uncertainty of the time and amount of this loss can be eliminated by insurance for the insured.
Regarding the insured himself, the premium is charged so that this certainty can be given.
2. Provide Protection
The next main function of insurance is to protect against possible losses. This loss is not certain to come or when it will come and if there is a risk, someone can suffer a loss no matter how big it is without insurance.
For this reason, insurance exists to guarantee payment for losses to protect the insured from suffering. Indeed, they cannot know the occurrence of risks, but they are ready to bear the losses for these risks.
3. Risk Sharing
Because risk is uncertain, losses arising from risk are also uncertain. When a risk occurs, of course, generally the losses that arise will be borne by those who are exposed to the risk.
In ancient times, risk sharing was only done when there was damage or death. However, in this day and age, with risk probabilities, this can be adjusted and accepted by anyone who pays a premium to get protection.
Secondary Function
Next, is the secondary insurance function or benefit.
1. Loss Prevention
Working with other agencies involved in the prevention of societal harm, insurance can mitigate losses which may result in lower payments to the insured. That way, there is a thrifty attitude that can help us pay less premiums.
With lower premiums, it will invite more institutions to work together and make payments less to the insured. In this way, premiums are further reduced and many institutions are interested in providing protection to the public.
Then, insurance also indirectly helps financially belonging to health organizations, firefighters, educational institutions, or other organizations engaged in preventing public losses from damage or death.
2. Providing Capital
Insurance provides capital? Yes, the accumulated funds are invested in productive channels. Industries, businesses, and even individuals can benefit from investments and loans from insurance companies. The reason is, people’s death rate is minimized with the help of investment in insurance.
3. Increase Efficiency
The nature of insurance can reduce, even eliminate the misery and worry about losses due to property damage or death. With such certainty, people can treat themselves better.
This will also trigger them to achieve better things and become more efficient en masse.
Insurance eliminates the worry and agony of loss due to death and property destruction.
4. Helping Economic Progress
The protection provided by insurance to the community from major losses in the form of damage or destruction, up to death, gives the initiative to work hard for the betterment of society.
Next, there will also be factors of economic progress arising from society, such as capital, property, valuable assets, human resources, to machines. Thus, society will not lose much.
Insurance Features
What are the features covered by the insurance? Let’s find out:
- Insurance is a risk management plan to use a policy as a hedge against uncertain losses
- Coverage from insurance will not reduce the amount of loss that may be faced, but will ensure that the loss is divided and distributed among several parties.
- Many clients of insurance companies collect their risks in one package.
- Thus, the insured pays the premium together and gets the money claimed from the accumulation of these funds when one or several of them experience unwanted things.
- Insurance coverage may apply to vehicle damage costs, property damage/loss, medical expenses, and others depending on the type of insurance.
- The main components of an insurance policy include premiums, policy limits, and deductibles. policyholders need to check thoroughly when purchasing an insurance policy.
Insurance Types
Before choosing to pay for a policy, you should first identify the types of insurance so that the benefits are in accordance with our expectations. The following types of insurance need to know:
Life insurance
In order to protect the family due to premature death or death during the policy period, we can take advantage of life insurance. The reason is, this insurance provides coverage if the insured family dies due to certain things.
Thus, this type of insurance helps grieving families to struggle financially which may experience obstacles due to the absence of a breadwinner.
Term Insurance
As the most common form of life insurance, term insurance means we pay a premium for an agreed period of time. If you experience death within this period, your coverage fund will be given to your family.
Even so, if you stay healthy and survive after the policy period, the money will still be in the hands of the insurance company.
Lifetime Insurance
In contrast to the notion of term insurance, whole life insurance is one that provides coverage for life and generally reaches the age of 99 years. This insurance is indeed designed to protect the policyholder for life, as long as he keeps the policy active and consistently pays premiums.
This type of insurance is also known as a hundred year compensation policy which provides lifelong insurance protection to a person. This insurance product will provide compensation for death that can occur at any time during the contract period.
Comparison of Sharia and Conventional Insurance
Unit Link Insurance
Next, unit link insurance is insurance as well as an investment plan. By paying a premium, we will get coverage as well as purchase units of equity, debt or other instruments related to the market.
Thus, this insurance has the potential to provide opportunities to create wealth other than as a provider of life insurance.
Health Insurance
In addition to life insurance, we can buy health insurance for ourselves or our family, such as spouses, parents, siblings, to children.
Generally, several insurance companies have cooperative ties with hospitals, so we can use the policy number to take advantage of non-cash services at these bound hospitals.
In other cases, we can also claim reimbursement for treatment or hospitalization. Previously, check the scope of the types of diseases or health problems that can be covered. Don’t forget, verify the type of fee covered.
Education insurance
Similar to unit linked insurance, education insurance can also function as an investment scheme. When paying premiums for children aged 18 years or a certain age according to the provisions of the insurance policy, we are guaranteed to use the educational purposes of the child and not other people, in accordance with applicable regulations.
To estimate how much you might need as your child grows up, use an educational calculator to calculate it. Calculators of this type are often available from insurance companies or websites that offer insurance.
In this type of insurance, the parents or guardians of the insured child become the legal owners of the policy.
Investment Insurance
This is investment insurance where we can buy policies while making investments. Unit link insurance is included in investment insurance which provides benefits in the form of protection and value derived from the development of investment funds according to existing options.
Just as the name suggests, there are two benefits of unit linked insurance, namely protection and cash value. So, part of the premium that needs to be paid by policyholders is allocated for protection and investment.
Vehicle Insurance
In the current era, it seems that vehicle insurance is mandatory in order to protect valuable assets from accidents or other damage and cover losses that may need to be borne.
Moreover, traffic regulations also advise us to carry papers, including insurance when driving freely.
Accident insurance
Generally, accident insurance is often underestimated because people think their company has provided protection for accidents while working. However, think again about our activities and working conditions.
If a job is included in the accident-prone category, we should buy an accident insurance product because risks can occur anytime, anywhere, whether at work or on the road.
Corporate Insurance
Protection will be obtained by employees of a corporation in corporate insurance which is group insurance. In general, companies usually provide corporate insurance to “maintain” their employees as valuable assets related to business continuity.
Corporate insurance itself offers a variety of benefits. Several types are popular, such as group life insurance or group health insurance. This insurance offers protection for corporate or company employees, so the policyholder’s membership is only valid if someone is still an employee of the corporation.
Old Age Insurance
After decades of work, enjoying life is everyone’s dream. For example, spending time with family and doing various trivial activities or hobbies that previously could not be done during productive times has become a pleasurable agenda of its own to be lived.
Even so, of course it still costs money. However, old age insurance can provide a solution. Because, we will get protection and receive some money to go through retirement when that time comes.
Travel Insurance
When buying plane or train tickets, we often find the option of buying insurance at a minimal cost. There is also the option of buying travel insurance if we are going to go abroad or often travel by plane. With this insurance, we can claim for trip cancellations, flight delays, or lost luggage.
Conclusion
In addition to the types above, there are also various types of insurance coverage policies related to goods, furniture, machinery, and so on. There are also types of insurance for fire (damage due to fire), sea (cargo ships), and so on.
Digital Insurance Revolution
Those are various discussions related to the meaning of insurance and the various benefits that we can receive if we use it.
Matobers, it is important to pay attention to the existence of insurance in addition to the various risks that we may receive during life, both risks with small, medium and large losses.
For this reason, insurance can be a very useful aspect to be used according to our needs for various risks. Also pay attention to the main needs and the type of insurance that we buy.