Introduction to Insurance

What is insurance

In life, losses and misfortunes occur from time to time. We face risks daily.

Insurance is a financial protection that takes care of consequences of risks that may occur despite measures being taken to prevent their occurrence. Insurance helps mitigate against the financial impact of unexpected occurrences.

How Insurance Works

Insurance provides a mechanism of risk transfer and sharing by pooling of risks among persons exposed to similar risks. The pooling of risks spreads it over a large number of people, hence reducing the burden on each of them. Pooling of risks means that each person contributes a small amount of money into a unique fund to cover the risk. Any person who suffers a loss from the insured risk is compensated from the money collected in the fund.

Importance of Insurance

Insurance provides financial protection against unforeseen occurrences that could have an adverse impact.
Insurance is a form of risk transfer thus reduces one’s financial exposure.
Insurance offers peace of mind. Allows someone to focus on their daily life without constant worry about potential losses.
Insurance provides a way for businesses continuity by covering financial losses that might otherwise be hard to recover from.
Insurance eases financial burden to family members and dependants in the event of unplanned circumstances such as emergencies, illnesses and accidents which require urgent financial intervention.
Insurance helps in planning for future needs through various models of savings and investments.
Insurance supports business growth and wealth creation by providing financial protection through various insurance products.
Insurance protects lenders from financial losses if a borrower dies before repaying a loan, through credit life insurance.
Insurance provides opportunities for investments and job creation.

Who needs insurance

Everyone needs insurance because we are all exposed to various risks, regardless of age, occupation or type of organization.

Classification of Insurance

Insurance is classified into two broad categories namely; Long Term and Short Term insurance.

Long Term Insurance: Long-term insurance refers to policies that last for more than one year. These insurance products mainly cover risks related to life. Examples include life insurance, education insurance, and credit life insurance. They provide payments in the event of death or when the policy matures.
Short Term Insurance: Short-term insurance refers to policies that last for one year or less. These policies cover both life and non-life risks. Examples include motor vehicle insurance, personal accident insurance, medical insurance, public liability insurance, and fidelity guarantee insurance. These products provide compensation for financial losses caused by covered risks during the policy period.