Insurance by definition is a contractual promise by an entity known as a Surety to pay a party a sum certain if that party known as an Insured sustain an injury or an event that causes a financial loss under the terms of an Insurance Contract.

The parties to an insurance contract are the surety, that is the insurer who underwrite the insurance contract (policy). Usually the surety is a licensed insurance company. However a surety does not specifically have to be an insurance company. Lloyds of London a well known surety is not an actual insurance company. As a surety it insures high risk ventures such a shipping, oil tankers and airliners. The methodology for this is done through what are called Names. Names are individual investors who deposit money with Lloyds to assure the existence of a fund to compensate an insured entity in the event that a loss is sustained. The insured party will pay a premium to the surety (Lloyds). If the shipment of cargo, oi etc. reaches its destination, Loyds will return to the Names their deposit plus a portion of the premium that Lloyds charged the insured as the surety. This is the profit that the Names receive through Lloyds. The balance of the deposit will represent, the profit earned by Lloyds. If in fact there is a loss sustained by Lloyds insured the fund created by the Names will be used to compensate the insured.

Insurance in general will be offered by a licensed insurance company which is also called a carrier. Insurance and the premiums that are charged for an insurance contract or policy is largely dependent upon one major fact specifically "Risk". The greater the risk involved in the insured activity, the higher the premium. Different types of insurance policies deal with different degrees of risk.

Insurance carriers such as GEICO, Allstate, Nationwide or State Farm, will charge a premium for the insurance policies such as automobile or life insurance which are designed to cover the risk involved in the issuance of the policy and create a profit for the carrier. Insurance companies will often use these profits to invest in various revenue producing projects such as mortgages and pension funds. This activity adds to the profitability of the insurance carrier.

As we said above insurance premiums are predicated upon the risk involved in the insured event. Another major aspect of an insurance contract is the requirement that the insurance policy must relate or cover an insurable interest that the insured has. By definition an insurable interest requires that the insured have an ownership or leasing right in the property for which insurance is being sought. As an example in order to insure your house with a homeowners insurance policy, you must own the home. If you wish to insure your car with an automobile insurance policy, you must either own or lease the vehicle. In all of these situations there is in fact an insurable interest.

Life Insurance

In order for an insurable interest to exist in life insurance policy, generally a relationship has to be in existence to allow for the issuance of the life insurance policy. As an example where there is a married couple the spouses might seek a life insurance policy which is predicated upon each of their lives. Thus if one of the spouses predeceases the other, the surviving spouse will receive the death benefit. In this instance the fact of the marital relationship creates the insurable interest.

Another example of the creation of an insurable interest might exist as between business partners. If two persons are partners in a law practice, the fact of the business partnership creates an insurable interest. As such each of the partners in the law practice can obtain a life insurance policy predicated up the life of the other partner.

It should be noted that if the marriage or business partnership subsequently dissolves the life insurance policy can be maintained provided that the policyholder continues to pay the premiums.

Life Insurance in Divorce Actions

Quite often when people are involved in matrimonial actions a court will order that a party, usually the wealthier or so called monied spouse maintain in full for otherwise obtain a policy of life insurance on behalf of the spouse receiving maintenance and child support. This is done by the court to assure that any sums a spouse is directed to pay for matters such as maintenance, child support and equitable distribution of marital property will in fact get paid. This can also be accomplished by way of a matrimonial agreement, wherein the parties have agree to the terms of maintenance, child support and equitable distribution. The agreement can require that one of the spouses maintain an appropriate policy of life insurance to assure payment of the sums required by the marital agreement in the event that the spouse who is contractually required required to make such payments is deceased.

Fire/Homeowners Insurance

If you purchase a home and take out a mortgage in connection with the purchase, the lender will require as a condition of granting the mortgage that the borrower obtain and maintain a policy of Homeowners Insurance. The lender will require that the policy of Homeowners Insurance obtained by the purchaser/borrower be sufficient to rebuild or repair the home if the property is destroyed or damaged by a hurricane or fire. The policy itself will cover damage from what is termed a "hostile fire", meaning a fire caused by an event that the homeowner was not personally responsible for. This might include an electrical fire or fire caused by a heating system malfunction.

Under no circumstances will a policy of Homeowners Insurance cover a property owner for a fire deliberately set by the policyholder which is commonly referred to as arson. If a homeowner deliberately sets their home on fire, there will be no insurance coverage available.

Question:

Discuss in general terms why and how insurance is relevant to the public and in you personal life.