A contract to pay a premium in return for which the insurer will pay compensation in certain eventalities, e.g. fire, theft, motro accident. The premiums are so calculated that, on average in total, they are sufficient to pay compensation for the policy-holders who will make a claim together with a margin to cover administration costs and profit.
In effect insurance spread risk, so that the loss by an individual is compensated for at the expense of all those who insure against it, and as such it has an important economic function.
The tradisional forms of insurance are general insurance, i.e. marine, fire and accident, and life insurance, the last name strictly being assurance, because the cover is given against the occurence of an event which is inevitable. There are also many other kinds of insurance, including sickness and unemployment insurance, som of which, like national insurance (U.K.), insurance for private medical treatment,are not carried out by the traditional insurance companies.
In many countries there are important income tax concessions on life-insurance premiums, and life insurance is a popular way of providing for old age and purchaising a house or even equity shares, as well as protecting the financial position of dependants.
Reference: The Penguin Business Dictionary, 3rd edt.