16 Main Importance of Insurance | Everything You Should Know

The process of insurance has evolved to protect the interest of the people from uncertainty. The principles of insurance are becoming more and more useful in the present day. Insurance server not only the interest of individuals but also fulfills the needs of individual groups. It also transforms our modern social order. The insurance industry is different from other manufacturing and service industries.

The basic difference between insurance products and other products is that consumers’ interests are actively involved even after the sale of insurance products since their liabilities have to be met by the insurer, no such customer interest is involved in other products except the only commitment is to ensure efficient post-sales services.

Importance of Insurance

The activities carried out by insurance companies are of paramount importance from the consumer’s point of view. The insurance companies are contractually bound to compensate for the potential losses to consumers that may arise in the future. The funds at the disposal of the insurers are essentially policy holder’s funds.

The Insurance business warrants some controls on the business activities of the insurers so that consumers’ interests will be protected. Insurance is an essential tool to protect corporate with large spread-out businesses against losses that could devastate the business.

The insurance sector plays a vital role in the process of economic development. The importance of insurance can be explained in threefold. It is useful to individuals, businesses, countries, and society as a whole. Let us now discuss the importance of insurance:

  1. Insurance Provides Safety and Security
  2. Insurance Affords Peace of Mind
  3. Insurance Protects Mortgaged Property
  4. Insurance Eliminates Dependency
  5. Life-insurance Encourages Saving
  6. Life Insurance Provides Profitable Investment
  7. Life Insurance Fulfils Needs
  8. Uncertainty of Losses
  9. Business Efficiency
  10. Indemnification of Keyman
  11. Enhancement of Credit
  12. Continuity of Business
  13. Welfare of Employee
  14. Protects Wealth of Society
  15. Enhances Economic Growth
  16. Reduce Inflation
Importance of Insurance
Importance of Insurance

Uses of Insurance to an Individual

The following is the importance of insurance basis on the uses of insurance to an individual:

  1. Insurance Provides Safety and Security
  2. Insurance Affords Peace of Mind
  3. Insurance Protects Mortgaged Property
  4. Insurance Eliminates Dependency
  5. Life-insurance Encourages Saving
  6. Life Insurance Provides Profitable Investment
  7. Life Insurance Fulfils Needs
Uses of Insurance to an Individual
Uses of Insurance to an Individual

Insurance Provides Safety and Security

Insurance provides safety and security against loss in a particular event. In the case of life insurance, payment is made either on the death or the maturity period whichever is earlier. It provides security to the family in case of premature death and payment in old age.

Similarly, the property of the insured is secured against loss on fire in fire insurance. In other insurance also this security is provided against the loss at a given contingency.

Insurance Affords Peace of Mind

The security wish is the main motivation. This wish stimulates people to work. If the wish is not satisfied it creates unrest or tension in the people. This in turn reduces the wish to work more.

Security removes fear, and uncertainty, automobile accident, damage, and death are uncontrollable. It is not in the hands of human beings. By means of insurance uncertainty in all walks of life can be eliminated.

Insurance Protects Mortgaged Property

In the case of a mortgage of property, the property mortgaged is taken over by the lender. The family of the deceased will be deprived of the uses of the property. At the same time, the mortgagee insists to get the property insured to safeguard his interest in the event of damage or destruction of the property.

It is because in the event of any damage to the property section copy owner is to pay the unpaid loans. Similarly, the mortgagee also gets an adequate amount for the destruction of the property.

Insurance Eliminates Dependency

At the death of the Head of the family, the difficulties of the family need not be mentioned especially as the majority of us are aware of it. Similarly, with the destruction of property also the concerned will suffer a lot. It results in not only suffering for the family but also their standard of living will be lowered.

The family may go even to the extent of begging on the roads. The family looks to others more benevolent them the Head of the family in the absence of protection against such dependency. Insurance protects them and provides an adequate amount at the time of suffering.

Life-insurance Encourages Saving

The element of protection is present in life insurance. The protection element exists only in respect of property insurance. In most life policies the element of savings re-dominates. These policies combine the programs of insurance and savings. Saving with insurance has certain advantages.

Life Insurance Provides Profitable Investment

Individuals unable to handle their own funds have been pleased to find out an outlet for their investment in life insurance. The better ways of investing in insurance can be endowment policies, deferred annuities, multipurpose policies, etc. Insurance policies have tax exemptions under the Income–tax Act.

No single individual can invest regularly in his own capacity with safety and security and profitability. Life insurance provides all these benefits at a lower cost.

Life Insurance Fulfils Needs

Life insurance policies satisfy family needs, old-age needs, re-adjustment needs, special needs, and the clean–up needs of an individual.

Uses of Insurance for Business

These are the importance of insurance in business:

  1. Uncertainty of Losses
  2. Business Efficiency
  3. Indemnification of Keyman
  4. Enhancement of Credit
  5. Continuity of Business
  6. Welfare of Employee
Uses of Insurance for Business
Uses of Insurance for Business

Uncertainty of Losses

In this age of business, trade, industry, and commerce a huge number of properties are used. The property may turn into his even with slight negligence. It may be fatal not only to the individual but also to the property or even to third parties. Renovation and reconstruction are possible only with the help of insurance.

In the absence of insurance, nobody will like to invest huge amounts in business due to uncertainty. No person can be sure of his life and health for a long-time. In such circumstances, insurance provides security to the dependants in the event of the pre-matured death of the earning member of the family.

Business Efficiency

When the owner of the business in free from uncertainties of risks, he can devote much his time and energy on business. This may result in increased profits. All businessmen both old and the new are guaranteed payment of adequate amount in the event of death or even the destruction of property or goods. Thus, insurance stimulates the businessmen to work-hard by insuring their risks.

Indemnification of Keyman

Keyman is that particular man whose capital, expertise, experience, energy, ability to control, goodwill make him the most valuable asset in the business. His absence may reduce the income of the business. The death or disability of such a valuable man may cause more serious loss than that by fire or any hazard.

The potential loss to be suffered and the compensation to the dependants of such employee require an adequate provision which is met by purchasing adequate life policies. The most suitable policy in this case may be either term insurance policy or convertible term insurance policy.

Enhancement of Credit

Loans can be availed by pledging insurance policies. The insurer advances against policies without any complicated procedure due to certainty of recovery at the death of the insured. The amount of the loan will under no case exceed the cash value of the policy and the interest thereon.

Incase of death of the borrower the lender can adjust the proceeds towards the loan and the interest thereon. If the borrower is not willing to repay the loan borrowed with interest accrued there on, the lender can surrender the policy and the loan and the interest get rapid. Insurance properties are the best collateral and adequate loans are granted by the lenders.

Continuity of Business

In case of partnership firms, the unexpected death of one of the partners may lead to financial crisis and as a result, the firm may be dissolved. In case of business concerns the Joint Life policies will provide sufficient funds to meet such emergencies.

Sometimes, each partner can insure individually to the extent of his interest in the business and in the event of his unexpected death not only the interest of the business but also his dependants are protected. In the event of damage of properties of the business, property insurance protects the business properties against any unexpected disasters.

Welfare of Employee

The welfare of the employees is the responsibility of the employer. Therefore, the employer, to protect their interest against any eventuality, undertakes the provision for early death, provision for disability, provision for old age etc. These contingencies are easily met by life insurance, sickness and accident and pension which are provided by group insurance.

The group insurance premiums are generally paid by the employer. This is the best way to protect the interest of the employees by the employer. Since, group insurance gives security to the employees, the wish to work more for the concern. This in turn results in increased production. Increased production results in increased profits. Increased profits lead to better facilities to the employees.

Benefits to Country

The following is the importance of insurance to the country:

  1. Insurance provide funds to the government for providing basic facilities and to develop infrastructure.

  2. It has enabled the country to get foreign exchange (49%, FDI is permitted in the insurance sector).

  3. Insurance relieves the government of the burden of supporting a family, in case of the untimely demise of the breadwinner.

  4. Insurance promotes trade and industry by providing risk cover.

  5. Insurance companies pay taxes out of profits earned. This is an important revenue source to the government.

  6. Insurance companies are permitted to invest 5% of the funds in the capital market. LIC alone has invested around Rs.28,000 crore in the capital markets. Such investments develop the capital market.

Uses to Society

The following are the some of the imporatnce of insurance to the society:

  1. Protects Wealth of Society
  2. Enhances Economic Growth
  3. Reduce Inflation

Protects Wealth of Society

Loss of wealth can be protected by the insurance schemes. Life insurance protects against loss of life. The human resource will generate more income if it is properly protected, educated etc. Property insurance protects properties against fire, accidents etc.

New types of insurance are invented to protect the property of the society against possible losses. Insurance provides financial security against old age, death, damage, destruction, disappearance of wealth including human wealth.

The risk free business and industry enhances the security. Insurance protects the present, future and potential human resource and property resource. Insurance creates security, prosperity, happiness etc everywhere in the world in general and in India in particular.

Enhances Economic Growth

Insurance provides strong mind, protection to property and adequate capital to generate more wealth. Protection is given to section copy cattle, machines, tools and crop through insurance. This type of protection may lead to increased production in agriculture, in industry, in factory etc.

Insurance directly provides safety and indirectly provide a number of fringe benefits. Welfare of employees creates a conducive atmosphere to work. In nutshell, insurance meets all the requisites of the economic growth of the country at large.

Reduce Inflation

Insurance reduces the inflationary pressures in ways. Firstly, by extracting money in supply of way of premiums collected and secondly, by providing sufficient funds for production. The above two steps will reduce the inflation.

As far as India is concerned as for as 5% of the total money in supply is collected by way of premiums. The share of premium contributed to the total investment of the country was about 10%. Thus, increased money in supply and decreased production are controlled by insurance business. There are the two main causes of inflation.

Conclusion of Importance of Insurance

The socio-economic significance of insurance has been well realized all over the world and it will be no exaggeration to say that industrial world without insurance is like a car without shock-absorber. A father with a large family to support rests easy because he is insured against death.

The farmer with his crop ripening in his field knows that his insurance protects him against financial ruin by flood, rain, fire and winds storms, fog etc. The same is true about businessmen. Therefore, it is safe to believe “Insurance is the shock-absorber of Industry and Individual”.

The primary function of insurance is to spread the financial losses of insured members over the whole of the insuring community, by compensating the unfortunate few from the funds built up from the contributions of all, including fortunate many who escape losses. Besides, the practice of insurance has many secondary or subsidiary functions which contribute to the welfare of the individual or society.

It tends more and more to transform our modern social order, fosters both private and public interest, individual prudence, acts as an accelerator and as stabilizer of economic growth. Insurance has attained so great a popularity and importance these days that it has now become almost a home-world. Practically, every kind of risk to which human being or property may be liable can be insured against such risks.

No trade, commerce and industry can function efficiently without insurance. Insurance spreads the financial losses of insured members over the whole of the remaining insured whose assets are not damaged. Thus, it acts as a middle man for such social co-operation. It is a co-operative devise designed to compensate one against losses because the insurer collects premium from a large number of policyholders and distributes to the victims only.

The life insurance policy affords protection to individuals, windows, dependants, to meet the critical situations. Fire-marine and miscellaneous policies help the development of trade, commerce and industry. From social and economic points some of the advantages of insurance are:

  1. It spreads risks
  2. It builds up confidence and removes fears.
  3. It is a means of savings
  4. It accumulates large funds for national development
  5. It promotes international trade
  6. It is help in competition
  7. Insurance helps in spreading education
  8. It provides facility of loan on the basis of insurance policy
  9. It solves social problems
  10. It reduces prices
  11. It forms an important part of the country’s invisible exports
  12. Insurance reduces losses
  13. It is an accelerator and stabilizer of economic growth
  14. It encourages executive efficiency.

FAQs About the Importance of Insurance

What is the importance of insurance?

The following importance of insurance for individual, business, country and society:
1. Insurance Provides Safety and Security
2. Insurance Affords Peace of Mind
3. Insurance Protects Mortgaged Property
4. Insurance Eliminates Dependency
5. Life-insurance Encourages Saving
6. Life Insurance Provides Profitable Investment
7. Life Insurance Fulfils Needs
8. Uncertainty of Losses
9. Business Efficiency
10. Indemnification of Keyman.