Insurance

 Insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursement against losses from an insurance company.

Types of Insurance:

• Life Insurance
• Non-life Insurance

Life Insurance – The insurance policy whereby the policyholder (insured) can ensure financial freedom for their family members after death. It offers financial compensation in case of death or disability. 

While purchasing the life insurance policy, the insured either pay the lump-sum amount or makes periodic payments known as premiums to the insurer. In exchange, of which the insurer promises to pay an assured sum to the family if insured in the event of death or disability or at maturity. 

Depending on the coverage, life insurance can be classified into the below-mentioned types:

• Term Insurance: Gives life coverage for a specific time period.
• Whole life insurance: Offer life cover for the whole life of an individual
• Endowment policy: a portion of premiums go toward the death benefit, while the remaining is invested by the insurer.
• Money back Policy: a certain percentage of the sum assured is paid to the insured in intervals throughout the term as survival benefit.
• Pension Plans: Also called retirement plans are a fusion of insurance and investment. A portion from the premiums is directed towards retirement corpus, which is paid as a lump-sum or monthly payment after the retirement of the insured.
• Child Plans: Provides financial aid for children of the policyholders throughout their lives.
• ULIPS – Unit Linked Insurance Plans: same as endowment plans, a part of premiums go toward the death benefit while the remaining goes toward mutual fund investments. 

Non-life Insurance – Everything apart from life can be insured under non-life insurance. It offers financial compensation on any loss other than death. General insurance covers the loss or damages caused to all the assets and liabilities. The insurance company promises to pay the assured sum to cover the loss related to the vehicle, medical treatments, fire, theft, or even financial problems during travel.

Non-life Insurance can cover almost anything, and everything but the five key types of insurances available under it are –

• Health Insurance: Covers the cost of medical care. 
• Fire Insurance: give coverage for the damages caused to goods or property due to fire.
• Travel Insurance: compensates the financial liabilities arising out of non-medical  or medical emergencies during travel within the country or abroad
• Motor Insurance: offers financial protection to motor vehicles from damages due to accidents, fire, theft, or natural calamities.
• Home Insurance: compensates the damage caused to home due to man-made disasters, natural calamities, or other threats

Function of Insurance:

A) Primary Functions

    a) To provide assurance: Human life is in full of risk. To minimize risk or to save from uncertainty, people follow insurance policy. Insurance provides amount of losses to the insured and saves from risk. So it is function of insurance to provide assurance against possible future losses.

    b) To distribute risk: Insurance is an instrument to share the financial loss. It is medium through which, few losses are divided among larger number of people. All the insured add the premiums towards a fund and out of which the person facing a specific risk is paid.

    c) To provide financial protection: The elementary purpose of insurance is to provide security against future risk, accidents and uncertainty, insurance cannot avoid the risk from taking place, but can assure compensation of the losses arising with the risk. Insurance is in reality a protective cover against economic loss, by apportioning the risk with others.

    d) Evaluating risk: Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk. Risk is the basis for ascertaining the premium rate as well. 

B) Secondary Functions

    a) To mobilize capital: Insurance is the best saving and investment option, restricting unnecessary expenses by the insured. The premium, collected from innumerable policyholders by the insurance company constitutes huge funds which are used in various income generating activities. The funds raised are invested in productive activities.

    b) To increase efficiency: Insurance warns individuals and businessmen to embrace appropriate device to prevent unfortunate aftermaths of risk by applying safety instructions, installation of automatic sparkler or alarm system etc. Insurance keeps the businessmen free from worries of various risk. Their self-confidence becomes strong. As result their work efficiency also increases.

    c) To promote the foreign trade: Insurance assists international trade. The international trade among different countries is based on marine, airways and land route. Chances of fire and marine perils may be in the course of trade transaction. Insurance takes away these risks an promotes foreign trade. 

    d) To provide mental peace: Insurance provides mental peace to insured. It removes the tensions, fears, anxieties, frustrations or weakness of the human mind associated with the future uncertainty. It compensates to the insured whenever any loss occurred due to calamities.
    e) Maintain financial stability: Various natural calamities and unforeseen adversities like fire, accident, riots, earthquake, landslide, flooding etc create instability in business world. Insurance provides assurance to the insured person or firm to compensate the financial loss caused by such adversities.

Need and importance:

The need and importances of insurance are explained below:

(a)  Individual and family point of view

:- Insurance provides economic protection, encourages to save money, improves living standard and increases self respect. The insurance gives following various benefits:

(i) Economic protection:- The insurance provides economic protection to individual and family. It safeguard the dependent members of a particular family in case of immature death of the family head or earning member from economic crisis. It helps to protect individual and the family as a whole financially during old age, sickness, unemployment, retirement, accident and theft.

(ii) Increase in self respect:- Insurance company compensates the loss of property to the insured person. In care of immature death of the insured person, the insurance company provides the insured amount to the family members of decreased thereby helping them to maintain their livelihood with self respect without depending on others.

(iii) Incentive for economy:- The insured person has to pay the fixed insurance premium on time to the insurance company regularly. This compels a person to curtail or reduce his unnecessary expenses to meet the payment of insurance premium.

(iv) Protects from financial crisis in future:- It helps to solve the financial difficulties that may arise in future in respect of higher education and marriage of children. The amount of insurance premium paid on installment basis is not very high. On maturity of insured period the insured person receives a big amount which he can utilize to meet the immediate financial needs for education & marriage of the children etc.

(v) Improves the standard of living:- The insurance safeguards against loss of property and life of a person in the form money. The loss of property and the life of a person so compensated by the insurance company helps to raise/ improve the living standard of the people.

(b)  Business point of view

:-  Importance of insurance from the business point of view can be justified from the following points.

(i) Basis of credit:- It can be taken as an important basis of credit. An insured person can get loan facilities from banks and financial institutions against the guarantee of life insurance policy document. In case of untimely death of the loanee the bank and the financial institutions can recover their loan amount given from the life insurance policy of the deceased.

(ii) Increases efficiency:- The insurance keeps the businessman free from worries of various risks of loss. The businessman can devote to his business activities without any feeling of risks. This helps to increase the working efficiency of the businessman.

(iii) Protection from uncertain losses:- It is difficult to forecast any impending risks in business by the business man. The insurance helps to protect the entrepreneurs from the uncertain risks of losses. Insurance is one of the very important factor that has helped in tremendous development of modern business.

(iv) Facilitates trade:- There various risks involved in trade. The goods lost on transit due to accident, fire, theft, burglary, perels of the sea, etc. are compensated by the insurance companies. There are various risks involved in foreign trades through seas routes. Marine insurance provide, protection from the loss and helps to develop the foreign trade.

(c)  Social point of view 

(i) Protection of wealth:- The insurance helps to bring the positive changes in the behavior wisdom and feeling of responsibility etc. among the individuals. Security of individuals and protection of their property in the society is ensured. As a result of this the risk taking capacity of the individuals increases.

(ii) Helps in maintaining standard of living:- The insurance helps the dependents of the insured person maintain their living standard with self respect without depending on others. So, it is one of the reliable source to maintain the living standard of the people in the society.

(iii) Reduces social Evils:- It helps to keep the people in the society away from social evils such as begging, crimes etc. After the death of an insured his dependents are not required to resort to unfair means of living. This also increases the employment opportunities thereby reducing unfair means of living or decreasing social evils.

(d) Government point of view 

(i) Economic Development:- Insurance has played a very important role in the development and expansion industries, trade and commerce by providing economic protection. The amount of insurance premiums so collected by the insurance companies are invested in productive and profitable fields i.e. in industry, trade and other economic activities. This has resulted in increase in trade, industries and financial companies. So, the insurance has remarkable contribution towards the economic prosperity of the country. The insurance companies pay huge amount of tax to the government which has increase the government revenue.

(ii) Formation of Capital:- The people have become conscious about their future. They started to feel he sense of economic protection through insurance companies. This has resulted increase in insurance policies. The huge amount of insurance premium collected by the insurance companies help in formation of capital. The capital so formed is invested in large scale industries and help to flourish industries.

(iii) Creation of employment opportunities:- The establishment of insurance companies have contributed a lot in creating employment opportunities to the unemployed youths of the country.