In order to understand the role of insurance, you need to realize the role of an umbrella in your household. In the same way insurance protects you from unanticipated loss due to fire, accident, theft and death. The word used here is “indemnity”- a synonym of “protection”, which provides financial coverage through reimbursement.
The insurance sellers convince you to buy a “provision of indemnity” almost against everything in your life. Such provision of indemnity is known as a “policy”, which is a fully documented agreement to cover the loss against a particular thing, citing all the norms therein.
Functions of insurance
- Providing protection for every important object in life- The basic function of insurance is to provide security against future risk, accidents and insecurity. Insurance can not prevent damage from happening but can take charge of provision of reimbursement of a particular sum as compensation for the loss. It is a protective cover against economic loss.
- It takes charge of the over all risk- By definition, insurance is an instrument to share the financial loss. It acts as a medium to bear the few losses among a large number of people. The entire insured pay premium but only few facing loss get paid for that.The ideal instance is in an organization a group of two hundred employees are insured for the risk of accidental death benefits during work hours but only those who die or get injured in accidents get compensation for the loss.
- Insurance perfectly assesses the risk- What is the potential of risk in a certain circumstance can be perfectly assessed by the insurer. The insurer fixes up whether a particular thing including the life of a human being is exposed to high or low risk. Accordingly the insurance companies lay down norms for formation of policies. The basis of risk determines the amount of premium. Life insurance of India sells various ordinary and policies with money back guarantee for life coverage, education of children and for other purposes. The policies with money back guarantees are usually expensive and you have to pay more premium than the ordinary policies. The provisions of risk coverage for all these policies are different.
- Insurance provides a sense of certainty against all insecurities- By and large every thing is in the world is perceived as short lived and insecure. Life, property, job, business, health and every important thing in life face unanticipated damage and loss. Insurance maintains provision for providing financial coverage and mental peace to all the insured in such situations.
- It prevents loss by educating others about it- The insurers have in-depth knowledge about various aspects of risk. It warns individuals about consequences of not taking proper steps to safeguard loss for their health and business. Now-a-days private insurance companies have extended health coverage up to the age of 75 of an individual. It educates businessmen to take coverage against new kinds of losses arising out of unforeseen situations.
- Insurance covers larger risk with small capital- What will be the loss in case of your untimely death? It is difficult to quantify it in monetary term. Well, taking into consideration your liabilities and overall responsibility towards your family members, your insurer apportions a healthy sum to cover your life. The privilege is you need not pay a large sum for that, only a small sum in shape of premium is taken by the insurer on a periodic basis. It pays the entire sum after the maturity of the policy.
- It helps the development of larger industries- Those industries operating in risky business surroundings need protection. Fire, theft, robbery and any such loss arising out of unforeseen situations are covered well by the insurers.
- Insurance is a tool for savings and investments- Insurance is a good investment option. Particularly it is helpful in tax exemption. It is also good tool for savings because at the end of period of the insured sum, you get the entire sum deposited as installments of premium with interest.
- Insurance is a means for foreign exchange- Now-a-days; you can see a number of collaborations by Indian banks with foreign insurance companies. Any nation can be gainfully be employed with foreign collaborators and earn foreign exchange by doing business in other countries.
- Insurance is both a risk free investment and business- The nature of insurance as an investment and business is free from risk. It is very scrupulously based on a concept which has minimum risk prospect.