Need of Insurance:
Life of everyone is full uncertainties. Nobody knows what is going to happen in next moment. This element of unknown situation always hounds around the mind of a person and keeps him worried to think as to what will happen in future in case of any mishappening. This worry is to think about the future of the person and his family. Among a number of worries the main and very important is economic uncertainty of himself or his family.
If anyone is satisfied with his present earnings, he also thinks whether or not his present day capacity of earning will last for long. Perhaps there remains an iota of fear that it may not last for the long. On this very point everyone thinks about to secure his future.
Under the impression of securing future one thinks about the adoption of saving and investment plans. . He not only thinks about himself but also about his family. In case of any miss happening everyone is worried as to what shall happen to his family.
Everyone knows that there is no substitute in case of death of an earning member of the family and no compensation is able to fulfil the gap in case of death of the earning member. But for supporting economically upto some extant the method adopted is known as insurance.
The life insurance is such a cover that provides security to the family of insured in case of his death. Life Insurance in such cases provides some solutions to the worries of family members.
Once upon a time it was very difficult to convince people for getting an insurance cover but today it has become a need of the day. Today the life insurance does not cover the risk of life only but also provides many added benefits also in the field of saving and investments.
People need insurance because the unexpected does happen. Whether it is a fire, a car wreck, illness or a death, the financial consequences can be devastating if you are uninsured. Insurance helps people have peace of mind when life’s unexpected events happen.
In Case Of Non-Life Insurance Also The Life Is Full Of Uncertainties:
Other than life there are many fields which create a lot of worries in every one’s life. After insuring life or purchasing a life insurance policies no one is absolved of the entire worries of life.
There remains many fields to worry about. Every field need some security cover and to ensure such security cover one is not able to apprehend the future unfortunate happenings. It therefore becomes prudential to get insured for visual or un-visual events one is able to foresee.
Such event may be conceived:
1. You never know what is going to happen:
This is the main reason for having insurance. If you are covered and someone breaks in to your home and steals something you get it replaced, if you break your hip you get it replaced etc. This is how insurance should work.
2. You can’t trust nature:
Recently in 2010 a cloud burst in Himachal Pradesh took life of hundreds of people and thousands of persons were left as homeless people. In a situation of terrorists regime any one is exposed to the risk of life and business. These are just for example of the destructive forces of nature. Add storms, hurricanes, tornadoes, earthquakes, tsunamis, floods etc. into the mix and it becomes very clear that insurance is still very necessary!
3. You can’t trust other people:
Accidents happen to everyone, but there are people who cause accidents through negligence, a drunk driver for example. Not being insured doesn’t mean you can’t sue them, but at least you are covered from the start!
4. It’s not as expensive as you might think:
Insurance plans can seem expensive, but there are always ways to save money, like bundling different types of insurance together for example.
5. For your peace of mind:
Knowing that you (and your family) are covered by an insurance policy if something unfortunate does happen can help put your mind at ease.
The need of insurance is well felt when one has to bear the losses from his own pocket. When pocket does not allow to bear the expenses incurred on losses the insurance come to rescue.
Insurance is purchased to protect you from a catastrophic loss when you KNOW you wouldn’t be able to afford the loss. For example, health event/condition such as serious accident/stroke/cancer/heart attack and everything in between that would cause you to be out of work temporarily or permanently, home fire that burns down half the home, car accident that could be in lacs to a total loss, death and now family is on the street, property stolen, business liability when someone sues you…etc..
Either one bears all such expenses from his pocket or gets these reimbursed from the insurance company is matter of fact that insurance cover has become a need of the day. . One pays a very small amount of money for the promise that a LOT of money is pledged in the event of a covered loss.
Functions of Insurance:
When we talk about functions of insurance one thing comes to our mind that after purchasing an insurance policy we need not to worry about our future. This is a wrong concept. Every insurance policy is subject to the terms and conditions contained in the insurance agreement and therefore any insurance serves a limited purpose as agreed to between two parties the Insurer and the Insured.
One cannot expect more than what one has insured himself. It is pertinent to note that the functions of any insurance remained confined to the terms and conditions of different type of insurance policies.
However there are certain functions which apply to every kind of insurance including life insurance as well as general insurance that includes every type of insurance such as home, automobile, jewellery, property and other valuable assets.
The functions of Insurance cannot be explained because of its diversity but in order to understand we can find a classification of functions as follows:
1) Primary Functions:
The Primary function of Insurance is as we think about any insurance. One feels insured and contended about future risks only because one is sure to be compensated for any loss of future. It is therefore Primary function of Insurance to provide protection against future risks, accidents and uncertainty.
No insurance can arrest the risk from taking place, no insurance can prevent future miss happenings, but can certainly provide some cover for the losses of risk. In real terms Insurance is a protective cover against economic loss by sharing the risk with others, (the pooling members).
(ii) Collective Risk:
The Insurance policies whether life insurance or general insurance are purchased by lacs of people. But all of them are not subjected to losses every year. It is only a few or negligible who become victim of some miss happenings. In other word lacs of people contribute towards insurance and only a few people need its cover.
It is therefore clear that insurance is a method by means of which a few losses are shared by a large number of people. All the people insured contribute by paying annual premium towards a fund out of which the persons exposed to risks are paid as per the terms and conditions of the insurance policy purchased by them.
(iii) Assessment of Risk:
What is volume of risk is determined by the Insurance companies by assessing diverse factors that give rise to risk. The rate of premium is also decided on the basis of risk involved.
Unless we are insured we remain uncertain about our capability to meet the future risks. But once we are insured it converts our uncertainty into certainty of bearing future risks.
2) Secondary Functions:
(i) Prevention of losses:
In simple words we can say precautions are better than the treatment. It is better instead of seeking the help of insurance if one adopts such measure which prevent the losses. Every Insurance prescribes to take preventive measures against losses. Such as installation of safety devices like automatic sparkler or alarm system, CCTV system etc.
If such type of preventive measure exist there shall be lower rate of premium for getting insurance cover against risks. Prevention of losses is to adopt preventive measures against unexpected losses. For example while driving a two wheeler we use helmets only because we take preventive measures to avoid any accidental loss. It is not certain that an accident is going to happen even than a preventive measure is adopted.
If an insured take such steps he saves a lot in form of the amount of premium required to be paid. If prevention techniques have been adopted and applied the Insurance company may rate the risk at lower level and shall prescribe a lower rate of premium otherwise a higher rate of premium shall be charged.
(ii) Covering Larger Risks with small capital:
Every businessman is always worried about the security of his business. After making large investments in the business it is natural to take care of the business investments. There are two alternatives first one is that the concerned businessman should invest out of his own pocket to create a proper security. The second method is to get his business activities insured.
In such a case the insurance relives a businessman from security investments by paying small amount in the shape of premium against larger risks and uncertainties. This assuages the businessman from security investments for a small amount of premium against larger losses.
(iii) Helps in development of larger Industries:
Larger Industries are prone to more risks in their setting up. The large industries have diversified fields of functioning where one field sometimes has no relation with the other field of the same industry. The activities of large industries are diversified that it goes above any planning to cover every type of risk.
It is only insurance that comes not only to help these large industries against possible risk but also help them to grow. It becomes possible only because insurance provides an opportunity to develop to those larger industries which have more risks in their setting ups.
3) Other Functions:
(i) Insurance is a tool used for saving and investments:
By purchasing any Insurance Policy it becomes completion by the purchaser to make payment of the insurance policy. This completion is blessing in disguise. Most of the policy buyers particularly individuals do not know the purpose of payment of premium. They know only one thing that paying premium is compulsory for them. The fact is otherwise true.
Once an insurance policy is purchased it assume the compulsory way of savings. Not only savings but such funds collected by insurance companies are further invested to the benefit of insured.
Because it is compulsory it restricts the unnecessary expenses by the insured’s on one hand and on the other hand insurance provides them the opportunity to avail Income tax exemption for the amount paid as insurance premium. Some prudent people take up insurance as good investment option also.
Such savings help growth in national economy.
(ii) It is one of sources to earn Foreign Exchange:
The business of insurance has crossed the national borders of any country. While traveling by Air one needs aviation insurance. While on board at sea whether humans or cargo it needs marine insurance which is also spread over across the boarders of any country. In simple words the insurance has become an international business and is necessary also.
It being an international business any country is free to earn foreign exchange as much as per the polices of insurance devised in a way to attract more and more foreign business. It is a good source of earning foreign exchange for any country.
(iii) Risk Free Trade:
Insurance promotes export insurance, which makes the foreign trade risk free with the help of different types of polices under marine insurance cover.
In its most common usage refers to circumstances in which an insurance company tries to recoup expenses for a claim it paid out when another party should have been responsible for paying at least a portion of that claim.
Ongoing through the functions of insurance there appear that the business of insurance has inherited certain character sticks as well.