What is Insurance? Functions, Benefits & How does It Work?

Why should business owners have insurance?

Once a lifetime, everybody is advised to buy insurance. It could be either life, health, car etc. But there always comes a thought like why should I buy insurance? Or what is the need to buy insurance for my car when I drive pretty well? Contrary to thinking like that, you should always be insured for important things because it provides you safety and security when things are not in your favour. Before that, you should know the meaning of insurance, its benefits, features and all important things related to insurance.

What is Insurance?

Insurance is a legal binding between two parties, where the insurer protects the insured. Here, the insurer is the insurance company, and the insured is the individual. A person can take insurance against either health, property, vehicle etc. The insured has to pay a certain fee, either monthly or yearly, to get protection for a particular period.

For instance, if you had an accident while driving a car and you are hospitalised. Then your health insurance would cover your medical costs, and your car insurance would cover damages to the car. Also, the insured has to pay some insurance premium to the insurance company.

What is an insurance premium?

It is the amount that is paid periodically by the insured to the insurer for covering the risk. In other words, it is the charges that a person has to pay the insurance company to be secured.

Functions of Insurance

There are various functions of insurance, and the most important function among them is to share the loss of several insured people. Plus, insurance provides security against all the losses incurred by the person. Below are the functions of insurance:

1. Certainty

You must be thinking, what is an insurance policy? How does it provide certainty in uncertain times? With insurance, there is the certainty of payments when there is the uncertainty of loss. Insurance policy is better planning for uncertain loss, and it helps people relieve them in such difficult times. Insurance is like sharing your burden in uncertain times and providing certainty of payment of loss.

2. Protection

It is one of the important functions of insurance against the chances of loss. As you know, the time and loss incurred are uncertain, and so is the risk happening. Thus the person goes through loss in the absence of insurance. The insurance company gives a guarantee against the loss and protects from more sufferings. However, insurance won't stop people from going through an event of risk but would protect you against it.

3. Sharing of Risk

During uncertain events, the risk and loss arising from that risk are uncertain. The loss at the time of risk is held by all the people who are part of the risk. Previously, risk-sharing by the insurance company was done during the death of a person, but now things have changed. There is insurance for everything like a car, home, health etc. The protection is given, and risk is shared for every loss incurred by the insured.

4. Prevention With Loss

The insurance company ties up with institutions that work actively in preventing losses for society. This reduction in loss leads to fewer payments and more savings that results in lesser premium payments. These lesser premium charges by the insurance company attract more customers. Plus, the preventive measure was taken by the insurance company to protect people. Thus, insurance companies are engaged actively with fire brigades, health organisations and educational institutions that prevent the losses of people from damage and death.

5. Provides Capital

The insurance company provides capital to society, and the accumulated funds are being invested in other productive channels. The investment in insurance minimises the capital shortage in society. Plus, the business, individuals and industries are benefited from the investments and loans given by the insurers.

6. Efficiency

The insurance reduces the worries and misery at the time of loss or death. The insured is at peace of mind and is ready to dedicate themself to work completely. The person is carefree, and it improves their efficiency. This results in the betterment of society as people are daring to take healthy risk without worrying about damage.

7. Economic Progress

Insurance helps in protecting society from damage, death and destruction. This becomes the first step towards the betterment of society. Plus, the insurer gives loans to people against valuable assets that lead to economic progress.

Benefits of Insurance

There are various ways in which insurance policy benefits society and individuals. We have listed down few benefits of insurance below:

• Insurance policy benefits the insured with payment of losses. It is a contract that covers losses for individuals in uncertain events.
• It matches with cash flow uncertainty. This means, in the event of an accident, the insured does not have to pay from pocket.
• It provides evidence to financial resources by complying with legal requirements. Insurance meets the contractual and statutory requirements.
• Insurance promotes risk control activity. That means insurance provides incentives to manage the loss control programs.
• The insurance facilities give individuals and various organisations loans to guarantee that the insurance company will pay in case damage happens, reducing the lender’s uncertainty.
• Owning an insurance policy against anything gives the owner huge tax benefits. Insured can avail various tax benefits under Section 80C, 80D and 10 (10 D).

How Does Insurance Work?

The insurance policy operates on the concept of ‘risk pooling as it is legal binding between policyholder and insurer. Also, it includes circumstances where the insured or nominee receives the benefits from the insurer. The insurance helps in protecting you and your loved ones in case of damage or uncertain events. When you purchase insurance from the insurer for a particular period, you have to make regular payments. Also, the insurance company collects the premium from its customers and pools the money collected to pay for the losses. In the event of loss, you claim for it, and the loss will be bred by the insurer from the premium. However, you should claim loss during a specified period to get benefit from the insurance company.

Insurance provides financial security in case of uncertain events. There are various types of insurance like health, home, car, travel, business, etc. Before choosing insurance, do the necessary research. Visit OkCredit to know more about insurance and its benefits.

Also Read:

1) What is Sustainability in Business?
2) Is building Material Business Profitable?
3) How Profitable Is The Stationery Business?
4) What is the best business ideas to start on a highway in India?

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FAQs

Q. Why should business owners have insurance?

Ans. Business owners need business insurance to cover the loss. Business insurance gives protection against liability claims and property damage. If any business owner does not have insurance, they might have to pay through pockets to meet the loss.

Q. What is third party insurance?

Ans. Third-party insurance is the liability insurance that gives financial coverage. The financial coverage is given to the insured against liabilities incurred for loss/damage to the third party or property.

Q. What are different types of insurance?

Ans. There are various types of insurance like:

• Life Insurance: The insured gets insurance against their life in exchange for some monthly fee. If the policyholder dies or the insurance matures, then the amount is paid to his family or to beneficiaries.
• Health Insurance: Health insurance has become popular. Also, individuals can choose from various health insurance like a family floater, critical health condition and senior citizen health insurance.
• Home Insurance: Home insurance helps in protection against damages caused due to incurable events. After all, the home is a valuable asset.
• Motor Insurance: Every vehicle in India comes under the Motor Vehicle Act, and the insured can take advantage of third-party liability motor insurance. Generally, motor insurance comes in a package and provides accidental coverage, loss or damage to the vehicle.
• Travel Insurance: It has become mandatory for frequent travellers to have travel insurance. Travel insurance reduces the prepayment of travel expenses and sometimes provides credit card travel benefits.Education Insurance: It is a saving tool that helps you save a lump sum for your child when he pursues higher education. The amount saved in education insurance helps in funding a child’s higher education.