Role and importance of insurance

Uses to an individual

  1. Insurance provides safety and security: Insurance provides safety and security against uncertainties. In case of life insurance, payment is made when a person dies or when the insurance has expired. Security from Premature death and old age sufferings is also provided by life insurance. Security is also provided for other contingencies like loss due to fire or damage of property, goods, furniture etc.
  1. Insurance affords peace of mind: Insurance creates a sense of security and a person feels secure and can concentrate on his work, thereby reducing stress. The security banishes fear and uncertainty that might weaken the human mind as by means of insurance much of uncertainty can be compensated.
  1. Insurance protects mortgaged property: In case of death of the owner of the mortgaged property, it will be taken over by the lender back and the family will be deprived of its facilities. Insurance will provide enough amounts to pay off the unpaid loans.
  1. Insurance eliminates dependency: At the death of the husband or father, the family would suffer. Similarly, at destruction of property and goods the family would suffer a lot resulting into reduced standard of living and can reduce the economic dependency of the family. Here, insurance assists them and provides an adequate amount.
  1. Life insurance encourages savings
  2. Life insurance provides profitable investment
  3. Life insurance fulfils the needs of a person. The needs are divided as follows:

a.Family needs – Death is certain, but its time is uncertain, in case of an uncertain death the financial condition of the family may suffer. Therefore, to protect the family from such unstable conditions the insurance provides provision for children up to their earning period and the widow to meet the financial requirements

b.Old-age needs – In old-age the income of a person may reduce and with limited finance, the person will soon be left with nothing. A provision to protect the family and the old-age suffering is provided by insurance.

c.Readjustment needs – At the time of reduction in income due to unemployment, disability or death the readjustment of the standard of living of a family is required. It takes time for a family to adjust at lower-income and social obligations. To reduce the financial pressure the insurance provides adequate funds to overcome primary obligations and to adjust in the new lifestyle.

d.Special needs – When a person id death or is disabled to earn income, many needs of the family may remain unfulfilled like

  1. Marriage: the daughter may remain unmarried in such case insurance provides funds for the daughter’s marriage.
  2. Need for education: insurance policies provide annuities for education of the children irrespective of death or survival.
  3. Insurance needs for settlement of children: settlement of children takes time and in absence of funds they cannot be well placed and the education might go waste.

e.Clean-up funds – There are certain requirements that decrease the funds of the family after payment of after death ritual ceremonies, and payment of all taxes. Insurance comes to help fulfil those additional requirements.

Uses to business

  1. Uncertainty of business losses is reduced:

In absence of an insurance policy uncertainty will be at the maximum level and in the world of business a slight slackness or negligence can be fatal not only for the individual or the property but also for the third-party. Also the owner of the business might foresee contingencies that would bring great loss and to meet such situation insurance policy can be taken.

  1. Business-efficiency is increased with insurance:

A businessman can work more efficiently if he is free from the pressure of loss and can work better for the maximization of profit. The insurance policy guarantees payment of certain amount in case of death, damage, destruction or disappearance of the property of goods which allows the businessman to work hard and concentrate better.

  1. Key man indemnification:

Key man is the one who’s experience, expertise, energy, ability, skill, capital etc makes him most valuable asset. The absence of such person will adversely affect the business. The potential loss suffered and the compensation to his dependents requires adequate provisions that can be met by insurance policy. The amount of loss may be up to the amount of reduction in profit, expense in recruitment and training of such person etc.

  1. Enhancement of credit:

A business can obtain loan by pledging the insurance policy as collateral for loan. Insurance policies are best collateral for grants by the lenders. In case the borrower is unwilling to repay the load the lender can surrender the insurance policy. Also the interest rate cannot increase the cash value of the policy. In case of death the loan can be repaid by the policy along with the interest.

  1. Business continuation:

In case of death of a partner in a partnership, the surviving partners may have to suffer economically. The insurance policy provides enough funds at the time of death, to the partners as well as his dependents.

  1. Welfare of employees:

Welfare of an employee is the responsibility of the employer. The employee will put in his best offers if he is secured. The welfare of the employee can be provision for early death, disability, accident, sickness, old-age i.e. pension etc. Also, the premium for group insurance paid by the employer is the cheapest form of insurance for the employers to fulfil their responsibilities.

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