NEED AND PURPOSE OF INSURANCE

By NAISHADH J. DESAI
Director & National Treasurer
Indian Institute of Insurance Surveyor & Loss Assessors, India

The fundamental aspect to add more miles to our life is to know, study, implement and
achieve good level of fitness and good level of safety. Span of life is merely depending upon
degree of achievement of fitness and safety in our life.

Human life is not stagnant, it continuous to change with time and age, human body
deteriorated with age and time. So, practically it is not possible to achieve or maintain 100
% standards of fitness and safety. There is always possibility of some errors, missing of
something or always possibility to triggered something negative.

One cannot escape form such errors, one or either way they are bound to come and disturb
the life and that to without giving any sign. this may be illness or accidental This will
generate a certain degree of suffer to the concerns. Sometimes this can me minimum and
sometimes this can me huge. Sometimes we recovered easily and sometimes it becomes
very difficult to recover.

Here comes insurance to support in case of suffer which are difficult to digest. Any type of
insurance helps recovers and can put back the victim to normal

So, along with fitness and safety, it is also important to know the basics of insurance as well
as need and purpose of insurance in different areas.

02. NEED OF INSURANCE

We need insurance because we are exposed to various kinds of risks and the purpose of
insurance is to protect us from the loss caused due to those risks. Insurance plays a
significant role in the development of the individual life, business, property as well as
nation’s economy by providing the support and capital and it converts the uncertainty into
certainty and thus brings mental peace to the individuals. the need and purpose of
insurance can be understood through the different viewpoints, these different viewpoints
are individual’s view point, view point of business and industry and the view point of the
society.

03. NEED AND PURPOSE OF INSURANCE FROM INDICIDUAL VIEW POINT:

The various points included in this category are insurance provides safety and security to
the individuals, insurance provide peace of mind, insurance protects the mortgaged
property, insurance eliminates dependency, saving is encouraged through life insurance,
profitable investment is encouraged by life insurance and the needs of the individual are
fulfilled by life insurance. Let us discuss these points in detail,
In case of life insurance, individual as well as his family is protected by the insurance
company. The insured gets the amount of insurance at the time of expiry of the policy or
due to pre matured death of the earning member of the family, the insured get the amount
of insurance at the time of expiry of the policy or due to his pre matured death, his family
members get insurance amount and this provides safety and security to the insured as well
as his family members at the time of loss. Similarly, if the property is insured, then the
insured gets the amount of insurance if the property catches fire or is damaged due to any
loss or risk, again in this case, the insurance provides safety and security to the insured as
well as its dependents.

Insurance provides peace of mind, an individual purchases insurance policy with the primary
aim of security, if the individual keeps worrying about his life, his dependence and his
property, then he will not be able to concentrate in his mind in the constructive activities
and will not be able to work properly. Insurance provides a great deal of security to the
insured and leave him tension free about his life, his dependents and his property because
in case of loss, insurance company promises the insured to cover all the losses. The risks
are uncertain and the insurance policy converts the uncertainty into certainty and thus
brings peace of mind to the individual.

If the owner of the mortgaged property expires, then at the time of his death, his property
is taken over by the lender and the dependents of the deceased person are deprived of the
uses of the property, but if the mortgagee gets the mortgaged property insured, then in
case of loss or damage to the property, he will get the amount from the insurance company
to recover from the losses. Similarly, if the mortgagee dies, then the insurance company
provides the insurance amount to his dependents so that they may pay off the loan taken
on the mortgaged property.

At the time of death of the income earning member of the family, his family members or his
dependents lose their economic freedom and they suffer the agony of losing the income
earning person as well as losing their financial freedom. So they are forced to ask for
monitory help from the friends and relatives and their situation becomes pitiable, but if the
income earning member is insured, then at the time of his death, the insurance company
will take care of his dependents and will financially assist them and make them financially
independent.

Saving is encouraging through life insurance, life insurance provides both protection and
investment to the insured but in case of property insurance, only the element of protection
is present, in some of the life insurance policies, the element of saving and investment is
dominating, such policies encourage systematic saving against the timely and regular
payment of premium by the insured. In insurance premium, amount cannot be withdrawn
so the savings remain with the insured to be enjoyed over a longer period of time, the
insurance company provide full insurance amount irrespective of the premium deposited like
in case of premature death of the insured, full amount is provided to his dependents, in
insurance insured is bound to pay the premium so he makes an investment and this will
help him in long run.

Profitable investment is encouraged through life insurance, individuals through life insurance
policies unwillingly or unable to handle their funds get a good option to invest. These
different forms of investment are endowment policy, multipurpose policies and deferred
annuities. Such investment has an element of regular saving, capital formation and return
on capital, in India insured is exempt from income tax, wealth tax and gift tax.

03. THE NEED AND PURPOSE OF INSURANCE FROM THE VIEWPOINT OF

BUSINESS AND INDUSTRY

The need and purpose of insurance from the view point of business and industry, the
various points included in this category are insurance reduces the uncertainty of business
losses, insurance increases the efficiency of the business, insurance provides key man
indemnification, insurance enhances credit, insurance helps in continuation of business,
insurance encourages welfare of the employees. The first point that is insurance reduces
the uncertainty of business losses, in business property is employed and if there is
negligence towards the property, then it may turn into ashes. Accident may cause loss to
the individual, property as well as the third party, reconstruction cost may be higher, in such
case if the property is insured then the insured can claim the amount of loss from the
insurance company and in this way, he feels secured about the business as well as his
dependents.

Increases the efficiency of the business, insurance provides mental peace to the individual
and in this case the insured is relieved from the worry and he can devote more time to the
business and can find out more ethical ways to maximize his profit. Insurance converts
uncertainty into certainty by providing the insurance amount at the time of loss. The next
point of need and purpose of insurance from the view point of business and industry is
insurance provides key man indemnification, key man is the particular man who has the
expertise, experience as well as the management skills that makes him the asset for the
business, in case if the life of such person is lost, then the business will lose an asset and at
the same time, training and employing a new person on his place will be expensive for the
business. The dependents of the key man also require special provisions and financial
assistance if his life is lost on duty. In such situation, term insurance policy or convertible
term insurance policy fulfil such purpose for the business.

Insurance enhances credit, business can obtain loan by pledging the insurance policy as the
collateral for the loan. Insured get more amount of loan due to certainty of payment at the
time of his death. In case of death of the insured, the cash value obtained from the
insurance company can be utilized in repayment of loan along with the interest. If the
insured is unable to repay the amount, then the lender can surrender the insurance policy
and get the loan repaid along with the interest. The next point is insurance helps in
continuation of the business, in partnership business, the business may discontinue due to
the death of one partner and there may be financial problems to the firm as well. If each
partner in the insurance firm is insured, then the insurance company will pay the amount at
the time of his death.

In this way, business as well as the dependents of the deceased person will not suffer
financially and the same is the case with the property insurance. The next point is insurance
encourages welfare of the employees; welfare of employees is the responsibility of the
employer because the employees work for the employer. The employer must provide the
provision for the death, disability or old age of the employees, life insurance, accidental
insurance, sickness benefits and pension are provided by general insurance, premium for
group insurance is paid by the employer, this plan is cheap, reliable and secured, such
policies help in maintaining good relationship between the employer and the employees.

04. THE NEED AND PURPOSE OF INSURANCE FROM THE VIEWPOINT OF SOCIETY

The various points included in this category are insurance protects the wealth of the society,
insurance encourages economic growth, insurance reduces inflation.

Insurance protects the wealth of the society, individuals make the society and insurance
provides the life insurance policy to the individuals, this not only helps in compensating the
loss of the skilful and talented human beings but provides financial assistance to the
dependents of the deceased person. Various types of insurance like cattle insurance, crop
insurance and property insurance are available and such insurances promote security, this
security is about the life and property, this makes the individual tension free and promotes
mental peace in the society, insurance promotes education and advancement and helps the
society grow by providing security to the people in the society against the various types of
risk which they are exposed to.

Insurance encourages economic growth, insurance provides security of life as well as

property and provides capital to generate more money. Machine, cattle and crop insurance
protects against the different types of losses, employee insurance and other types of
insurance related to business provide confidence to the parties related to the business and
the business itself.

Thus, insurance helps in economic growth of the country, reduces inflation, insurances
helps in narrowing down the inflation gap by collecting the premium and investing the
same. It helps in making the funds available when required, the main cause of inflation is
increased money in supply and decreased production, this is controlled by insurance, so
students, this was the need and purpose of insurance and we also discussed the various
types of insurance organizations in this lecture, in the next lecture we will talk about the
insurance contract.