Maharashtra Board Class 12 Maths Commerce Part II Chapter 2 Insurance and Annuity PDF Download

Insurance and Annuity

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Fire, Marine and Accident Insurance

Annuity

Terminology of Annuity

Annuity Due

Sinking Fund

Introduction

Life is full of risk. Risk is due to uncertainty. It involves a loss or some other undesirable or negative outcome. All of us face some type of risk in every-thing we do and every decision we make. We often look for ways to avoid risk by taking steps to prevent it. However, it is impossible to completely prevent every possible risk. As an alternative, we try to minimize the impact of risk by having insurance or some other type of protection from loss. Insurance is a way of managing the risk in order to protect our life, property, vehicle, or other financial assets against possible loss or damage due to contingencies like burglary, fire, flood, earthquake, etc.

The verb "to insure" means to arrange for compensation in the event of damage or total loss of property or injury or the death of someone, in exchange of regular payments to a company or to the state. The word "insurance" means creation of some security or monetary protection against a possible damage or loss. Insurance is a legal contract between an insurance company (insurer) and a person covered by the insurance (insured). An insurance policy is a legal document of the contract or agreement between the two parties, the insured and the insurer.

Insurance is of two types: Life Insurance and General Insurance.

(1) Life Insurance

A person who wishes to be insured for life agrees to pay the insurance company a certain amount of money periodically. This amount is called the premium. The period of the payment can be a month, a quarter, half-year, or a year. In return, the insurance company agrees to pay a definite amount of money in the event of death of the insured or maturity of the policy, that is, at end of the contract period. This amount is called the policy value.

(2) General Insurance

General insurance covers all types of insurance except life insurance. General insurance allows a person to insure properties like buildings, factories, and goodowns containing goods against a possible loss (total or partial) due to fire, flood, earthquake, etc.

Vehicles can be insured to cover the risk of possible damage due to accidents.

In case of loss or damage, the insurance company pays compensation in the same proportion that exists between the policy value and the property value.

All contracts of general insurance are governed by the principle of indemnity, which states that an insured may not be compensated by the insurance company in an amount exceeding the insured's economic loss. As a result, an insured person cannot make profit from an insurance policy.

Teacher's Note

Insurance helps us when we face accidents or damage. Your parents might have car insurance or home insurance to protect their property.

Exam Trick

Remember: Claim = Loss × (Policy Value / Property Value). Use this formula to find how much money you get back if something breaks.

Points to Remember

Insurance is protection against risk and loss.
Premium is the money you pay to the insurance company.
Claim is the money you get back if something bad happens.
Policy value is the amount of property that is insured.

Let's Learn

2.1 Fire, Marine, and Accident Insurance

(1) Fire Insurance

Fire insurance is property insurance that covers damage and losses caused by fire to property like buildings, goodowns containing goods, factories, etc. It is possible to insure the entire property or only its part. The value of the property is called Property Value. The value of the insured part of property is called Policy Value. The amount paid to the insurance company to insure the property is called premium.

Premium = Rate of Premium × Policy Value

The period of a fire insurance policy is one year and the premium is expressed as percentage of the value of the insured property.

In case of damage to the property due to fire, the insurance company agrees to pay compensation in the proportion that exist between policy value and property value. The value of the damage is called "loss" and the amount that the insured can demand under the policy is called claim.

Claim = Loss × \(\frac{\text{PolicyValue}}{\text{PropertyValue}}\)

(2) Accident Insurance

Personal accident insurance is a policy that can reimburse your medical costs, provide compensation in case of disability or death caused by accidents. Accident insurance allows insuring vehicles like cars, trucks, two wheelers, etc. against to a vehicle due to accidents. This policy also covers the liability of the insured person to third parties involved in the accident. The period of such policies is one year.

(3) Marine Insurance

Marine Insurance covers goods, freight, cargo, etc. against loss or damage during transit by road, rail, sea or air. Shipments are protected from the time they leave the seller's warehouse till the time they reach the buyer's warehouse. Marine insurance offers complete protection during transit goods and compensates in the events of any loss.

The party responsible for insuring the goods is determined by the sales contract. The amount of claim is calculated by the same method that is used in the case of fire insurance.

Teacher's Note

Fire insurance protects buildings and shops. If your uncle's shop burns in a fire, the insurance company will give him money to fix it.

Exam Trick

Remember the formula: Claim = Loss × (Policy Value / Property Value). This works for fire, accident, and marine insurance too!

Points to Remember

Fire insurance covers damage from fire to buildings and goods.
Marine insurance protects goods traveling by ship, train, or plane.
Accident insurance helps if your car or bike gets damaged in an accident.
The claim amount depends on how much of the property was insured.
All three types use the same formula to calculate claim amount.

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