In simple language, term Insurance can be defined as an agreement between an individual ( policyholder ) and the insurance company where insurance company promises to cover part of the risk in the case of future loss. There is involvement of two parties: insurer and insured. The company which provides insurance is known as insurer /insurance Carrer and the individual who buys insurance is known as Insured /policyholder.Both the parties to the agreement are liable for their promises.As insured is supposed to pay a premium on time, where as the insurer is liable to compensate the loss of insured at the time of requirement.To cover the loss of insured, insurance company demands for a certain fixed amount called as Premium.
It is a fact, that humans life is prone to various risks, may be it is financial /health /property /goods /vehicle.Although we don't have full control over these risks it can be controlled to some extent with the help of a tool like Insurance. Insurance provides protection against any mishappening of future.It is a financial management tool under which policyholder transfers his risk to insurance company against some monetary compensation.The risk may or may not be financial, but policyholder must have some insurable interest either it is established through possession or ownership.
It is a way to bring mental peace in case of any complexity.This strategy ensures full or partial financial compensation in case of Loss.It is based on the risk sharing principle under which risk of few people can be spread into a large number of People insured against similar risk.
Let us understand it with an example. Suppose there are total 1000 number of houses in a village and the value of each house is 40,000 Dollars.The house owners took Insurance policy for their respective house with decided amount of premium $300 monthly. A fire occurred in a village in which 5 houses were burnt and the total loss was estimated around two hundred thousand dollars . Because they had to get their houses insured, it was the liability of insurance company to compensate their loss.And they paid 40,000 Dollars to each house owner.So the concept of insurance is that risk is divided among various people (1000) exposed to the same risk and the loss is compensated.
There are various types of insurance like Home Insurance , Motor Insurance, Health Insurance, Personal Accident Insurance, Travel Insurance, Commercial Insurance (Group Health Insurance , fire insurance, marine Insurance).All types of insurance have a common advantage is that provides protection to insured in case of any harm.
The importance of Insurance:
Insurance is a legal agreement between insured and insurer where insurer undertakes to indemnify the damage of insured in consideration of some premium amount.
It is nowadays an utmost requirement of people. It helps individuals to overcome the tough situations of life by mitigating their financial loss.In this challenging life where our future is uncertain , insurance provides security to People's life.It has developed so far under IRDA (Insurance Regulatory and Development Authority ).Its importance can't be overlooked. In fact, it is a safety tool for people.
Benefits to Insured :
A) It provides safety and security of life and other precious assets in case of any damage/harm
B) Insured can get tax relief by way of reduction from income, that decreases tax burden
C) Life Insurance Policies / other insured assets can be mortgaged while obtaining loan
D) It inculcates the habit of saving among people and helps them in future financial planning
E) It helps businessman, companies to focus more on their work instead of safeguarding their property
Benefits Of Insurance to Society :
A) In developing country like India, insurance funds can be used for the betterment/development of society
B) Insurance promotes social cooperation as burden of loss is contributed by many people
C) It provides sense of safety and security to the people of society
D) It provides safety to insured and his dependents during their life
E) It creates employment opportunities as the number of insurance companies are increasing
Benefits to Nation:
A) It helps country to earn foreign exchange (as FDI is permitted in Insurance sector)
B) It promotes trade and business
C) As insurance companies pay the tax out of their earnings, it is a good source of revenue for govt.
Insurance is the necessity of people as human life is characterized by uncertainty /damage. This compensatory tool provides sense of security to individuals in case of adversities of life.