ROLE AND IMPORTANCE OF INSURANCE
The process of insurance has evolved to protect people's interests from uncertainty by ensuring payment in the event of a specific occurrence. In today's world, the insurance principle is becoming increasingly popular and useful. It not only serves the goals of individuals or small groups of individuals, but it also has the potential to pervade and transform our modern social order. In this article, the role and importance of insurance have been discussed in three stages: (i) Individual uses, (ii) Individual uses to a specific group of individuals, such as business or industry, and (iii) Individual uses to society.
APPLICATIONS TO AN INDIVIDUAL
1. Insurance ensures your safety and security.
The insurance protects you from financial loss in the event of a specific occurrence. When it comes to life insurance, payments are made when the insured person dies or the policy term expires. Insurance covers the loss to the family in the event of a premature death as well as payment in old age. Life insurance, in other words, provides protection against premature death and old age suffering. Similarly, fire insurance protects an insured's property from loss due to a fire. This protection is also provided by other types of insurance against a loss in the event of a specific occurrence. The insurance provides protection and security against the loss of earnings due to death or old age, fire, and the damage, destruction, or disappearance of property, goods, furniture, and machines, among other things.
2. Insurance provides a sense of security.
The desire for security is the primary motivator. This is the wish that tends to stimulate more work; if it is not fulfilled, tension is created, which manifests itself in the individual as an unpleasant reaction, resulting in a reduction in work. Fire, windstorm, automobile accident, damage, and death are all events that are almost beyond the control of human agency, and the occurrence of any of these events can frustrate or weaken the human mind. However, much of the uncertainty surrounding the desire for security and its attainment can be alleviated through insurance.
3. Mortgaged property is protected by insurance.
When the owner of a mortgaged property dies, the property is taken over by the money lender, and the family is deprived of the property's use. The mortgagee, on the other hand, wants the property insured because if it is damaged or destroyed, he will lose his right to have the loan repaid. When the property owner dies young, the insurance will provide enough money to the dependents to pay off the unpaid loans. Similarly, when the property is destroyed, the mortgagee receives an adequate amount.
4. Insurance removes the need for reliance.
The destruction of a family is self-evident after the death of a husband or father. Similarly, when property and goods are destroyed, the family suffers greatly. It lowers living standards, and the suffering can lead to beggarly behaviour from relatives, neighbours, or friends. The family's economic independence is eroded or lost entirely in some cases. What could be a more pitiful state than for the wife and children to look to others who are more benevolent than the husband and father, in the absence of protection from such dependency? The insurance is there to help them and provides a sufficient amount in the event of a loss.
5. Life insurance encourages people to save money.
Only in the case of life insurance are the elements of protection and investment present. Only the protection element is present in property insurance. Savings elements predominate in the majority of life policies. These policies combine insurance and savings programmes. Investing in insurance has a number of additional benefits. (1) Because premiums must be paid on a regular basis, systematic saving is possible. Saving with a bank is entirely voluntary, and one can easily skip a month or two before completely abandoning the programme. (2) In insurance, the deposited premium cannot be easily withdrawn before the policy's term expires. In contrast, a savings account that can be withdrawn at any time will be depleted in no time. (3) The insurance will pay the policy money regardless of the premium deposited, whereas a bank deposit will only pay the deposited amount plus interest. As a result, the insurance provides the desired amount of insurance, while the bank only provides the deposited amount. (4) In insurance, the compulsion or force to premium is so high that if a policyholder fails to pay premiums within the grace period, his policy will lapse, and he will only receive a small portion of the total premiums paid. He must make every effort to pay the premium in order to keep the policy in effect. It would become a part of the insured's necessary expenditure after a certain period of time. In the absence of such coercion elsewhere, life insurance is the best way to save.
6. Life insurance is an excellent investment.
Individuals who were unwilling or unable to manage their owm funds were relieved to discover a use for their life insurance policies. Endowment policies, multipurpose policies, and deferred annuities are all better investment options. In life insurance, the elements of investment, such as regular saving, capital formation, and capital return with a certain additional return, are perfectly observed. Income tax, wealth tax, gift tax, and estate duty are all exempt from insurance policies in India. An individual cannot invest regularly with sufficient security and profitability on his own. All of these requirements are met by life insurance at a lower cost. If the insured amount is left with the policyholder's beneficiary, he can receive a regular income from the life insurer.
7. Life insurance meets a person's needs.
A person's needs are divided into the following categories: (A) Family needs, (B) Old-age needs, (C) Re-adjustment needs, (D) Special needs, and (E) Clean-up needs.
(A) Family Requirements
Death is unavoidable, but the timing is not. As a result, there is no way of knowing when the family will face hardships and financial difficulties. Furthermore, everyone is responsible for providing for their family. It would be a more pitiful sight to see a man's wife and children looking for someone more considerate and benevolent than the husband or father who failed to provide for them. As a result, provision should be made for children until they reach carning age and for widows until they reach old age. Any other type of insurance, aside from life insurance, will not be sufficient to meet the family's financial needs. The better way to meet such requirements is through whole-of-life policies.
(B) The elderly pay attention
When a person lives longer than his earning period, a provision for old age is required. The reduction of income in old age has serious consequences for the individual and his family. They will be left with nothing if no other family member begins to carning, and if there is no property, the situation will be even more pitiful. By issuing various policies, life insurance provides old age funds as well as family protection.
Re-adjustment Requirements (C)
When a family's income is reduced, whether due to unemployment, disability, or death, the family's standard of living must be adjusted. Family members will have to make do with a meagre income and adjust to a lower standard of living and social obligations. Before settling for a lower standard and being satisfied with it, they need a certain amount of adjustment income so that the main obstacles can be reduced to a bare minimum. Life insurance aids in the accumulation of sufficient funds. Endowment policies, anticipated endowment policies, and guaranteed triple benefit policies are all considered good substitutes for long-term care.
(D) Individuals with Disabilities
There are some special requirements of the family that are met by each individual family member. If a family member becomes unable to work due to old age or death, those needs may go unmet, causing the family to suffer.
(1) Education is required.
Certain insurance policies and annuities can be used to fund the education of children regardless of the father's or guardian's death or survival.
In the event of the father's death or a lack of financial resources to cover the costs of marriage, the daughter may remain unmarried. If a policy is purchased for this purpose, the insurance can provide funds for the wedding.
(3) The need for insurance in the event of a child's relocation.
Children's settlement after education takes time, and in the absence of adequate funds, the children will not be well placed, and their education will be wasted.
(E) Funds for cleanup
Following the death of a family member, ritual ceremonies, the payment of wealth taxes, and income taxes are all requirements that reduce the amount of money available to the family member. When it comes to meeting these requirements, insurance can help. The better policies for special needs are multipurpose policies, education and marriage policies, and capital redemption policies.
Insurance has also proven to be beneficial to the business community. The following are some of the applications:
1. The risk of business losses is lessened.
A large number of properties are used in the worlds of business, commerce, and industry. The property could be reduced to ashes if there is even a smidgeon of laziness or negligence. The accident could be fatal not only to the person involved or their property, but also to a third party. Only with the help of insurance is new construction and new establishment possible. In the absence of it, uncertainty will be at an all-time high, and no one will want to invest a large sum of money in a business or industry. A person's life and health may be in jeopardy, and he or she may be unable to sustain the business for a longer period in order to support his dependents. He can be certain of his earnings by purchasing a policy because the insurer will pay a fixed amount at the time of death. Again, a business owner may foresee contingencies that would result in significant loss. To prepare for such events, they might decide to set aside a reserve each year, but it would be impossible to accumulate due to death. However, an annual payment can be made to secure an insurance policy immediately.
2. Insurance improves the efficiency of a business.
When a business owner is no longer concerned about losses, he will undoubtedly devote more time to the company. The owner who is not concerned about his or her property can work more efficiently in order to maximise profits. With insurance policies, new and old businessmen are guaranteed payment of a certain amount in the event of a person's death; property or goods damage, destruction, or disappearance. The fear of losing money can have a negative impact on businessmen's minds. By removing the uncertainty, insurance encourages businesspeople to work harder.
3. Indemnification of Key Personnel
The most valuable asset in the business is the key man, whose capital, expertise, experience, energy, ability to control, goodwill, and dutifulness make him the most valuable asset in the business, and whose absence will significantly reduce the employer's income until such employee is replaced. In many cases, the death or disability of such valuable lives will prove to be a more serious loss than that caused by fire or any other hazard. The potential loss and compensation to such employee's dependents necessitate adequate provision, which is met by purchasing adequate life insurance. The amount of loss could be up to the amount of lost profit, expenses associated with hiring and training such people, and payments to the key man's dependents. In this case, a Term Insurance Policy or a Convertible Term Insurance Policy is more appropriate.
4. Credit Enhancement
The policy can be used as collateral to secure a loan for the company. Because of the certainty of payment at death, insured people are getting more loans. The maximum loan amount that can be obtained with such a pledge of policy, plus interest, will not exceed the policy's cash value. In the event of death, this value can be used to determine the loan amount as well as the interest rate. If the borrower refuses to repay the loan and interest, the lender has the option to surrender the policy and have the loan and interest repaid. The collateral of capital redemption policies can be used to issue redeemable debentures. Insurance properties are the best collateral, and lenders are willing to provide adequate loans.
5. Business Resilience
When one of the partners in a partnership dies, the business may cease to exist; however, the surviving partners may restart the business; however, in both cases, the business and the partners will suffer financially. At the time of death, the insurance policies provide sufficient funds. Each partner's interest in the partnership may be insured, and his or her dependents may receive that amount in the event of the partner's death. Property insurance protects a business's assets from disasters and the risk of a business's disclosure due to massive waste or loss.
6. Employee Well-Being
The employer is responsible for the employees' well-being. The former is employed by the latter. As a result, the latter must look after the welfare of the former, which may include provisions for early death, disability, and old age. Life insurance, accident and sickness benefits, and pensions, which are commonly provided by group insurance, easily meet these requirements. In most cases, the employer pays the group insurance premium. This plan is the most cost-effective way for employers to meet their obligations. When employees are assured of the above benefits, they will devote their full attention to completing their tasks. With the help of such schemes, the struggle and strife between employees and employers can be easily reduced.
In the following sections, we'll look at some of the ways insurance can benefit society.
1. The societal wealth is safeguarded
The insurat.ce can protect you from losing a specific amount of money. Loss of human wealth is covered by life insurance. If the human material is strong, educated, and unconcerned, it will generate more revenue. Similarly, property damage caused by fire, accident, or other causes can be covered by property insurance; cattle, crops, profits, and machines are also covered against accidental and economic losses. With the advancement of society, the wealth or property of the society becomes more hazardous, necessitating the invention of new types of insurance to protect them from potential losses. Every member will be financially secure against old age, death, damage, destruction, and the disappearance of his or her wealth, including life wealth. Instance protects society against degradation by preventing economic losses. Economic security is enhanced by the stabilisation and expansion of business and industry. Human and property resources are well-protected in the present, future, and potential. Children are receiving expert education, the working classes are unburdened, and the elderly are able to guide with ease. With the help of insurance, happiness and prosperity can be found everywhere.
2. The Country's Economic Development
Insurance provides a strong hand and mind, protection against property loss, and sufficient capital to produce more wealth for the country's economic growth. Agricultural losses such as cattle, machines, tools, and crops will be protected. This type of protection encourages more production in agriculture and industry. Factory premises, machines, boilers, and profit insurances give entrepreneurs more confidence to start and operate businesses. Employee welfare creates a pleasant working environment: The production cycle is accelerated by adequate capital from insurers. In business, property and human capital are similarly protected against certain losses, while capital and credit are expanded with the help of insurance. As a result, insurance satisfies all of a country's economic growth requirements.
3. Inflation reduction
In two ways, insurance reduces the inflationary resource. First, by reducing the amount of money in circulation to the amount of premium collected, and second, by providing sufficient funds for production, the inflationary gap is narrowed. In the Indian context, it was discovered that about 5% of the money in circulation was collected in the form of premium. The contribution of premium to total investment in the country was approximately 10%. The two main causes of inflation, namely an increase in money supply and a decrease in output, are effectively managed by the insurance industry. Insurance is required and sold.