Risks and uncertainties are part of life’s great adventure. Accident, illness, theft, natural disaster all are seen in the Universe. These uncertainties may happen at any moment. Insurance then is man’s answer to protect himself from such uncertainties. If one cannot win over man made and natural calamities, one should at least be prepared to face them and their after effects.
The principle of insurance works on the concept of a larger number of people exposed to a similar risk making a contribution to a common fund. Those who suffer losses due to the occurrence of these events are compensated for them from this fund. Modern life insurance caters to multiple needs for insurance.
The main needs include; (i) Cash and income needs just after death; (ii) Family income needs; (iii) Income needs of a widow on the death of her husband.; (iv) Cash and income needs of a husband on the death of his wife; (v)Retirement income needs; (vi) Education needs and (vii) Business needs.
Actually, Insurance serves the purpose of hedging one’s risks against unforeseen circumstances and save more. If that’s not all, it is superior to an ordinary savings plan as it provides full protection against risk of death. It encourages and forces compulsory savings unlike other saving instruments, wherein the saved money can be easily withdrawn. It provides loan to meet a temporary difficult phase and is also acceptable as security for a commercial loan. It offers tax relief to policy holders. For a policy taken under the Married Women’s Property Act,1 Act 1874 a trust is created for wife & children as beneficiaries. Based on the concept of sharing of losses, the society will benefit because catastrophic losses are spread globally.
Assets are insured, because they are likely to be destroyed or made non functional before the expected life time due to accidental occurrences. Such occurrences are Fire, floods, breakdowns, lightning, earthquakes, create perils. Such perils can cause damage to the asset, which is exposed to that risk which means that there is a possibility of loss. In the case of a human being, death is certain, but the time of death is uncertain. The person is insured because of the uncertainty about the time of one’s death. In case of a person who is terminally ill, the time of death is not uncertain, though not exactly known. It would be ‘soon’. One cannot be insured.
Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The risk can sometimes be avoided, through better safety and damage control measures. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. Insurance only compensates for the losses and that too, not fully.
Only economic consequences can be insured. If the loss is non financial, insurance may not be possible. Examples of non-economic losses are love and affection of parents, leadership of managers, sentimental attachments to family, innovative and creative abilities, etc. Life insurance, in particular is essentially acknowledged as a mechanism that eliminates risk-substituting certainty for uncertainly primarily by transferring risk from the insured to the insurer.
As regards Life Insurance, the original purpose of the life Insurance remains an important element, namely replacement of income on death etc. It also provides regular savings to one’s family and one self as a medium to long term exercise through a series of regular payment or premiums. This has become more relevant in recent times as people seek financial independent for their family. Unlike regular saving products, investment products are traditionally lumpsum investment where the individual makes a one off payments.
After Retirement, it provides for later years increasingly necessary, especially in a cultural and social environment. One can buy a suitable insurance policy, for periodic payment in one’s old age.