Insurance Definition According to Expert, Element, Function, Types

Insurance Definition: It seems we are no stranger to hearing the word insurance. Unfortunately this word has a negative connotation. Especially when we hear the word insurance agent, we tend to avoid it. 

However, sometimes we avoid what we don’t understand. So, what exactly is meant by insurance? Come on, see the meaning of insurance, its function, along with the examples below!

Definition of Insurance

What is Insurance Definition, Elements, Function and Types

Insurance definition is a form of agreement between the two parties, namely the Insured and the Insurer, in which the Insured pays a contribution to the Insurer in order to obtain a form of compensation for financial risks that can occur unexpectedly. 

In the context of a modern world, the Insurer means an existing insurance company, while the Insured is its customer. 

Definition of insurance according to experts

According to the Law of the Republic of Indonesia no. 40 of 2014 concerning insurance definition:

“Insurance is an agreement between two parties, namely the insurance company and the policyholder, which forms the basis for receiving premiums by the insurance company in return for:

  1. Insurance Definition provide reimbursement to the insured or policyholder due to loss, damage, costs incurred, loss of profits, or legal responsibility to third parties that may be suffered by the insured or policyholder due to an uncertain event; or
  2. Insurance Definition provide payments based on the death of the insured or payments based on the life of the insured with benefits whose amount has been determined and/or based on the results of fund management.”

What are the elements of insurance?

Insurance has 3 main elements, namely insurance premiums, insurance policies, and insurance claims. 

Insurance premiums are fees that must be paid by customers during an agreed period of time. Usually, premiums can be paid on a monthly, semi-annual or annual basis.

Meanwhile, an insurance policy is a legal document that regulates an insurance agreement. Starting from the value of the benefits, the amount of the premium, the risks covered, to the exclusions (risks that are not covered by insurance). Insurance policies are legal and legally binding. If a party violates the policy rules, then the other party has the right to stop cooperation or even sue that party.

Insurance claim is the process of formal submission to the insurance company when the customer experiences a risk covered in the insurance policy. If an insurance claim is made in accordance with the provisions stated in the policy, the insurance company will provide a sum of money as compensation for the financial risk experienced by the customer.

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So what is the function of insurance?

The main function of insurance is to help you overcome unexpected risks in life. Insurance does not guarantee that this risk will disappear, but at least you can minimize the financial losses that are experienced as a result of this risk.

You need to remember that the function of insurance is not as a certainty that our money will return and in a larger amount. The main role of insurance is not to earn more money, like investing, but to focus on protecting against risks that we cannot predict. 

In other words, insurance is our way of expecting the unexpected (preparing for things we cannot prepare for). Starting from the risk of accidents, the risk of falling ill, to the risk of losing the main breadwinner in the family. All of these risks are covered by insurance. 

What are the types of insurance?

Insurance itself is known in various types or types and grouped according to focus and risk. It is this focus and risk that determines the measure of uniformity in the risk borne according to the type of policy. 

This will be used by insurance companies to anticipate potential losses and set the level of premiums offered according to each type of insurance.

Here are the types of insurance available in Indonesia:

1. Life Insurance

This type of insurance is known to provide financial benefits to the insured upon his death. The payment system for different types of life insurance is also diverse. There are insurance companies that provide payment after death and others that allow the insured to claim funds before his death. 

Life insurance can be purchased for your own benefit and in the name of the insured or purchased for the benefit of a third party. Even life insurance is also known to be bought on other people’s lives. 

As an illustration, suppose a husband can buy life insurance that will benefit him after the death of his wife. Parents can also insure themselves against the death of the child.

2. Health Insurance

This type of insurance is also well known by the Indonesian community. Health insurance is an insurance product that deals with health problems incurred due to an illness and covers the cost of the treatment process. 

In general, the causes of covered illness whose costs can be borne by the insurance company are injuries, disabilities, illnesses, and even death due to accidents. Health insurance is also known to be purchased for the benefit of the insured only or for the benefit of a third party.

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3. Vehicle Insurance

The most popular vehicle insurance in Indonesia is a type of car insurance that focuses on liability for injuries to other people or damage to other people’s vehicles caused by the insured. This insurance can also pay for loss or damage to the insured motor vehicle.

Vehicle insurance is one of the general insurance products. This type of insurance boomed during the May 1998 riots because the event made the public’s interest in owning protection for private vehicles increase drastically.

4. Home and Property ownership insurance

As an asset that is considered valuable enough, usually home owners will protect themselves and their assets which can be in the form of a house or personal property with home and property insurance. 

This insurance provides protection against loss or damage that may occur to certain personal belongings of the insured. This insurance also protects and provides relief when the home or other insured property suffers a disaster such as a fire.

5. Education Insurance

This is the most popular insurance and is the favorite of policy holders. Education insurance is the best alternative and solution to guarantee a better life, especially for children’s education assets. 

The premium cost that must be paid to the insurance company varies according to the level of education that you want to obtain later. Understanding the importance of using education insurance for children is now something that parents pay attention to. 

The high cost of education and other conditions that worsen the economy such as the weakening of our currency against the US dollar will affect the cost of children’s education later. Realizing that this will obviously burden parents, it is not uncommon for parents now to choose to have education insurance.

6. Business Insurance

This insurance is a protection service against damage, loss, or a large amount of loss that may happen to a person’s business. This insurance provides compensation from damage caused by fire, explosion, earthquake, lightning, flood, storm, rain, collision, up to riots. 

Insurance companies usually offer a variety of benefits from business insurance such as protection for employees as business assets, investment and business protection, comprehensive life insurance for all employees, to health insurance coverage packages for employees.

7. General Insurance

General insurance or general insurance is protection against the risk of loss or loss of benefits and legal liability to third parties. This general insurance guarantee is short-term in nature (usually around one year). General insurance can be classified into several types, including:

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a. Social Insurance

This type of insurance is an insurance that every person or resident must have with the aim of every person having old age insurance. Premium payments are made by force, one example is by deducting a person’s salary every month.

 b. Voluntary Insurance

This insurance is carried out voluntarily. The type of voluntary insurance can still be further divided into 2 classifications namely Government Insurance and Commercial Insurance. 

Government insurance is insurance carried out by the government, while commercial insurance is insurance intended to provide protection to a person or family as well as companies from risks that may appear due to unexpected events.

8. Credit Insurance

Credit insurance is protection against the risk of debtor failure to repay credit facilities or cash loans such as working capital, trade credit, etc. It is closely related to banking services, especially in the field of credit. Credit is a loan in the form of money given by banks and financial institutions as credit providers to their customers. 

This credit insurance aims to protect banks or other financial institutions from the possibility of not getting back the credit lent to customers and help provide guidance and credit security. Credit insurance managers in Indonesia are entrusted by the government to PT. Indonesian Credit Insurance.

9. Marine Insurance

This type of insurance is specifically in the marine field whose function is to ensure the carrier and the owner of the cargo. Risks that may occur until the formation of this insurance are cargo damage, ship damage, and passenger injury. 

Marine insurance or navy insurance is a transfer of risk both for yourself and your belongings that use sea transport services. This insurance involves the use of shipping services in sending goods. 

Some factors that affect the premium of marine transport insurance are the insured goods, packing of goods, insured risk, transportation, and travel.

10. Travel Insurance

Overall, the function of travel insurance is not much different from the function of normal insurance as a form of protection for customers with a short period of time, i.e. as long as the premium buyer travels until returning home. 

The benefits and protection that will be obtained from having travel insurance include protection and cost coverage for accidents that befall the premium buyer, personal accident compensation, emergency treatment costs, body return, medical evacuation, and protection against luggage that is at risk of being lost. or broken.