PolicyStreet presents to you our first education series – Insurance, as Easy as 1 2 3, where we shed light about anything insurance related in a candid and entertaining way.
If you have a burning question, reach out to us at [email protected], leave us a reply below or even chat with us via www.policystreet.com. If your question tickles our funny bones, even better – we will feature them here to help others too.
Question 4: How does insurance work, in a nutshell?
A person has an [insurable interest] in something (e.g. his life/house/car to name a few), when damage, death or sickness would cause him to suffer a financial loss. If a breadwinner unexpectedly dies today, his family members will suffer a loss of financial stream to sustain their livelihood.
Therefore, he must take out an insurance policy protecting that something in order to exercise an insurable interest.
A premium is the amount of money that a person pays for an insurance policy. When a customer pays this sum to an insurance company, he essentially transfers his risks of getting into trouble and accidents through a written contract.
If all goes well and there is no loss, the insurance company will then recognize the premium as “income”. However, the story does not end there…usually. Life is unpredictable, and BAM! The unexpected can hit you HARD. So in case of a loss, the insurance company will then pay the customer the loss amount to help him move forward quickly after.
Another important thing to note about insurance is the [principle of indemnity].
Insurance puts the customer back to the financial position he was prior to the loss, and shall not reward or penalize the insured additionally for its loss. Not better, not worse. For instance, if the customer’s 10-year-old vehicle, valued at a market value of RM50,000 was stolen, insurance companies will compensate him RM50,000 so that he can get a similar vehicle. Again, nothing more, nothing less.