Insurance is a concept that many people have a negative perception of. This is especially true when it comes to insurance agents, who are often avoided. However, it is important to remember that we tend to avoid what we do not understand. So, what exactly is insurance? In this article, we will explore the meaning of insurance, its function, and provide examples to help you better understand this important financial concept.
Definition of Insurance
Insurance is an agreement between two parties, namely the Insured and the Insurer. The Insured pays a contribution to the Insurer in order to obtain compensation for unexpected financial risks. In today’s modern world, the Insurer refers to an insurance company, while the Insured refers to the customer.
Definition of Insurance According to Experts
According to the law of the Republic of Indonesia no. 40 of 2014 on Insurance, insurance is defined as:
“An agreement between an insurance company and a policyholder that forms the basis for the receipt of premiums by the insurance company in exchange for providing compensation to the insured or policyholder in the event of loss, damage, costs incurred, loss of profit, or legal liability to third parties. Insurance can also provide payments based on the death of the insured or payments based on the life of the insured with benefits determined and/or based on the results of fund management.”
According to the Kamus Besar Bahasa Indonesia (KBBI), insurance is defined as:
“The coverage provided by an agreement between two parties, where one party is obliged to pay contributions and the other party is obliged to provide full guarantee to the contributor in the event of something happening to the first party or their property, in accordance with the agreement made.”
Elements of Insurance
Insurance consists of three main elements: insurance premiums, insurance policies, and insurance claims. Insurance premiums are fees paid by the customer during the agreed period, which can be paid monthly, semi-annually, or annually.
An insurance policy is a legal document that regulates the insurance agreement. It specifies the value of the benefits, the amount of the premium, the risks covered, and any exclusions. Insurance policies are legally binding, and if either party violates the rules, the other party has the right to terminate the agreement or take legal action.
An insurance claim is the formal process of submitting a request to the insurance company when the customer experiences a covered risk. If the claim meets the provisions outlined in the insurance policy, the insurance company will provide financial compensation to the customer.
Function of Insurance
The primary function of insurance is to help individuals overcome unexpected risks in life. Insurance does not eliminate these risks but helps to reduce the financial losses resulting from them.
It is important to remember that insurance is not intended to guarantee a significant return on investment. The main purpose is to protect against risks that cannot be predicted. Insurance serves as a way to prepare for the unexpected, such as accidents, illnesses, or the loss of a breadwinner in the family.
Types of Insurance
There are various types of insurance available, each covering different risks. Some of the most common types of insurance include:
1. Health Insurance: This type of insurance provides coverage for medical expenses and can include outpatient, hospitalization, and daily benefits.
2. Life Insurance: Life insurance protects against the risk of death, particularly for the primary earner in a family.
3. Education Insurance: Saving for higher education can be challenging, so education insurance helps individuals prepare for the costs of education for their children.
4. Home Insurance: Home insurance protects against sudden damages to one’s home, such as fire or burglary.
5. Vehicle Insurance: Similar to home insurance, vehicle insurance covers unexpected damages to vehicles, such as accidents or theft.
6. Accident Insurance: This type of insurance provides coverage for financial risks resulting from accidents, including medical expenses and vehicle repairs.
7. Critical Illness Insurance: Critical illness insurance covers costs associated with serious illnesses, such as stroke, cancer, or heart disease.
8. Travel Insurance: Travel insurance provides protection for delays or damages to luggage during trips.
The choice of insurance depends on individual needs and circumstances. Health and life insurance are generally considered essential, while other types may be secondary depending on factors such as having children or owning a vehicle. Regardless, everyone is at risk of illness and can benefit from having insurance coverage.
Insurance plays a crucial role in protecting individuals from unexpected financial risks. By understanding the definition, elements, functions, and types of insurance, individuals can make informed decisions when it comes to selecting the appropriate coverage for their needs. Whether it is health insurance, life insurance, or any other type, having insurance provides peace of mind and financial security in times of uncertainty.