The process of insurance has been evolved to safeguard the interests of people from uncertainty by providing certainty of payment at a given contingency. The insurance principle comes to be more and more used and useful in modern affairs.
Not only does it serve the ends of individuals, or of special groups of individuals, it tends to pervade and to transform our modern social order, too.
Let us discuss the role and importance of insurance in detail to have a better understanding.
What is Insurance?
Insurance is a legal agreement between two parties i.e. the insurance company (insurer) and the individual (insured). In this, the insurance company promises to make good the losses of the insured on happening of the insured contingency. The contingency is the event which causes a loss. It can be the death of the policyholder or damage/destruction of the property. It’s called a contingency because there’s an uncertainty regarding happening of the event. The insured pays a premium in return for the promise made by the insurer.
How does insurance work?
The insurer and the insured get a legal contract for the insurance, which is called the insurance policy. The insurance policy has details about the conditions and circumstances under which the insurance company will pay out the insurance amount to either the insured person or the nominees. Insurance is a way of protecting yourself and your family from a financial loss. Generally, the premium for a big insurance cover is much lesser in terms of money paid. The insurance company takes this risk of providing a high cover for a small premium because very few insured people actually end up claiming the insurance. This is why you get insurance for a big amount at a low price. Any individual or company can seek insurance from an insurance company, but the decision to provide insurance is at the discretion of the insurance company. The insurance company will evaluate the claim application to make a decision. Generally, insurance companies refuse to provide insurance to high-risk applicants.
What are the types of insurance available in India?
Insurance in India can be broadly divided into three categories:
Life insurance
As the name suggests, life insurance is insurance on your life. You buy life insurance to make sure your dependents are financially secured in the event of your untimely demise. Life insurance is particularly important if you are the sole breadwinner for your family or if your family is heavily reliant on your income. Under life insurance, the policyholder’s family is financially compensated in case the policyholder expires during the term of the policy.
Health insurance
Health insurance is bought to cover medical costs for expensive treatments. Different types of health insurance policies cover an array of diseases and ailments. You can buy a generic health insurance policy as well as policies for specific diseases. The premium paid towards a health insurance policy usually covers treatment, hospitalization and medication costs.
Car insurance
In today’s world, a car insurance is an important policy for every car owner. This insurance protects you against any untoward incident like accidents. Some policies also compensate for damages to your car during natural calamities like floods or earthquakes. It also covers third-party liability where you have to pay damages to other vehicle owners.
Education Insurance
The child education insurance is akin to a life insurance policy which has been specially designed as a saving tool. An education insurance can be a great way to provide a lump sum amount of money when your child reaches the age for higher education and gains entry into college (18 years and above). This fund can then be used to pay for your child’s higher education expenses. Under this insurance, the child is the life assured or the recipient of the funds, while the parent/legal guardian is the owner of the policy. You can estimate the amount of money that will go into funding your children’s higher education using Education Planning Calculator.
Home insurance
We all dreaming of owning our own homes. Home insurance can help with covering loss or damage caused to your home due to accidents like fire and other natural calamities or perils. Home insurance covers other instances like lightning, earthquakes etc.
5 reasons why insurance matters
Why is insurance important? Let’s look at five key reasons.
1. Protection for you and your family
Your family depend on your financial support to enjoy a decent standard of living, which is why insurance is especially important once you start a family. It means the people who matter most in your life may be protected from financial hardship if the unexpected happens.
2. Reduce stress during difficult times
None of us know what lies around the corner. Unforeseen tragedies such as illness, injury or permanent disability, even death – can leave you and your family facing tremendous emotional stress, and even grief. With insurance in place, you or your family’s financial stress will be reduced, and you can focus on recovery and rebuilding your lives.
3. To enjoy financial security
No matter what your financial position is today, an unexpected event can see it all unravel very quickly. Insurance offers a payout so that if there is an unforeseen event you and your family can hopefully continue to move forward.
4. Peace of mind
No amount of money can replace your health and wellbeing – or the role you play in your family. But you can at least have peace of mind knowing that if anything happened to you, your family’s financial security is assisted by insurance.
5. A legacy to leave behind
A lump sum death benefit can secure the financial future for your children and protect their standard of living.
The role of insurance in the world economy
Insurance is one of the main and important fields of the economy. The main aim of the insurance is to protect people from risks and from dangers. As we know in modern period there are too many accidents, bad events and unexpected dangers. These risks can happen every time in social life.
People always think about this problem, how to escape from these risks. For this reason insurance is considered the best tool for these problems. People use insurance to keep their assets and life under guarantee. So, insurance gained popularity in the world. Insurance plays great role both in developed and developing countries’ economy. We can show the roles of insurance in world economy like that [8]:
- Insurance provides safety and security: Insurance always provides financial support and decreases dangers in economic and social life. As we know there is always a fear of sudden loss. Insurance also provides a cover against any sudden loss. For example we can say that, in case of life insurance financial assistance guarantee to the family of the insured on his death.
- Insurance makes financial resources: As an economic category insurance, which is part of the financial system, is the foundation and utilization process of the targeted finance funds established to eliminate the damage from the sudden accidents and emergency, to provide financial support to the citizens in the accidents connected with their private lives [2]. One of the main roles of insurance in economy is that, it generates financial resources by collecting insurance premiums. These funds are invested in government securities and stock. This process increases development economy of each country.
- Insurance increases savings: One of the main roles of insurance is that, it encourages people’s savings. We can show example life insurance to this process. Life insurance increases people’s savings due to payment of regular premium and it provides regime of investment. It develops a habit of saving money by paying premium. So, insured get the lump sum amount at the maturity of the contract [8]. Thus life insurance encourages savings.
- Insurance spreads risk: The insurance sector is susceptible to systemic risks generated in other parts of the financial sector. For most classes of insurance, however, there is little evidence of insurance either generating or amplifying systemic risk, within the financial system itself, or in the real economy [9].Insurance always protect people from loss, from danger. Many people know that danger can occur every time. For this reason person, which wants to insure his property, pay some insurance premium to insurance company. So his property guaranteed by insurance company. Whenever a loss occurs, it is compensated out of funds of the insurer. With this process insurance spreads risk in life. In addition to eliminating risk for the individual through transfer, the insurance device reduces the aggregate amount of risk in the economy by substituting certain costs for uncertain losses .
- Insurance gives medical support to society: Many companies insure their workers with medical insurance. A medical insurance considered essential in managing risk in health. Every worker can fall ill, or can victim of critical disease unexpectedly. For this reason medical insurance is one of the insurance policies that cater for different type of health risks. The insured gets a medical support in case of medical insurance policy. Medical insurance always protect people from illness, and company’s workers also can get treatment with medical insurance. With giving medical support insurance plays great role in society.
