Insurance- Functions, Benefits & How it Works

What do you mean by Insurance?

Insurance is a legal agreement between an insurance firm (insurer) and an individual (insured). In this case, the insurance company guarantees to compensate the insured for any losses incurred due to the covered contingency occurring. The contingency is the occurrence that results in a loss. It might be the policyholder's death or the property being damaged or destroyed. It's referred to as a contingency because the outcome of the occurrence is unclear. In exchange for the insurer's promise, the insured pays a premium. You pay premiums to the insurer regularly (which can be set up as an EMI for automatic deduction from your bank account), and they pay you back as an assured amount if something goes wrong. There are various types of Insurance such as Health Insurance, Life Insurance, Vehicle Insurance, etc. Let's understand the functions of insurance and its benefits. 

What are the Functions of Insurance?

The purpose of insurance is  to share the loss resulting from a certain risk among multiple people exposed to it and agree to insure themselves against it. The most critical role of insurance is to disperse risk across a group of people insured against it, share the loss of each member of society based on the likelihood of loss to their risk, and protect the insured from losses.

Types of functions of Insurance

The functions of Insurance have been given as follows, divided into Primary functions of Insurance and Secondary functions of Insurance. 

1. Primary Functions of Insurance

The primary functions of Insurance are:

• Protection and safety

The key function of insurance is to safeguard against the possibility of loss. The time and amount of loss are unpredictable, and if a risk occurs, the person will incur a loss if they do not have insurance. Insurance ensures that a loss will be paid and thereby protects the insured from suffering. Insurance cannot prevent a risk from occurring, but it can compensate for losses resulting from the risk.

• Provide safety and security

 Insurance provides financial support and decreases the risks that come with doing business and living. It ensures safety and security in the event of a specific incident. The basic function of insurance is to safeguard against future hazards, accidents, and vulnerabilities in this way. No insurance can prevent a risk from existing or prevent future catastrophes, but it can undoubtedly assist you by providing coverage for3 the hazard's misfortune.

• Collective Risks

People purchase insurance policies to protect themselves from tragedy. Regardless, not every one of them is subjected to bad luck regularly. Only a few people contribute to insurance. Each member of the general public who receives protection pays an annual premium to the reserve. People who are victims of hazards are compensated according to the insurance policy conditions, which helps them meet their financial demands during a challenging period.

• Risk Assessment

Insurance companies assess the level of risk by looking at the numerous factors that contribute to a chance. The procedure of determining premium rates is also based on the policy's risks.

• Certainty of payment

Insurance gives payment certainty in the event of a loss. Better planning and administration can help to lessen the risk of loss. In risk, there are various sorts of uncertainty. Will the danger occur, when will it occur, and how much loss will there be? In other words, the occurrence of time and the amount of loss are both unpredictable. All of these concerns are removed through insurance, and the insured is guaranteed money in the event of a loss.

2. Secondary Functions of Insurance

There are several secondary functions of Insurance. These are as follows:

• Financial Assistance

When you have insurance, you have guaranteed money to pay for the treatment as you receive proper financial assistance. This is one of the key secondary functions of insurance through which the general public is protected from ailments or accidents. Individuals look for insurances with lower premiums since it’s more affordable. Thus, one of the main outcomes of insurance is financial assistance to health organisations, fire departments, educational institutions, and other organisations involved in preventing mass losses due to death or destruction.

• Source of capital

Insurance is a source of capital for society. The cash accumulated is put into the productive channel. With the help of insurance investments, the death of the society's capital is reduced to a greater extent. The insurance industry, businesses, and individuals all profit from the insurers' investments and loans.

• Efficiency in productivity

The function of insurance is to relieve the stress and anguish associated with death and property destruction. A person can devote their body and soul to better achievement in life.

•  Contribution to economic progress

Insurance offers an incentive to work hard to better the people by safeguarding society against massive losses of damage, destruction, and death. The people also provide a large amount of capital, the next factor in economic advancement. Property, valuable assets, people, machines, and society are unlikely to suffer significant losses due to calamity.

• Tool of investment and saving money 

When you purchase an insurance policy, the insurance provider encourages you to install the insurance system. This eases the process of understanding how the insurance works and the process of paying premiums.

• Source of foreign exchange

Insurance known as Overseas Medical Insurance Scheme for Indians Travelling Abroad for Business and other purposes (OMIS) can be purchased. This can be purchased in Indian currency. On the other hand, Overseas Mediclaim Insurance Scheme for Employment and Studies [OMIS(E&S)] can be purchased in foreign currency. Therefore, this acts as a source of foreign exchange where individuals travelling outside the country can use insurance as well.

• Subrogation

Insurance policies usually have a subrogation clause which is defined as a right held by insurance carriers to legally pursue a third party who is responsible for the injury of the insured. Through this process, the insurance amount to be claimed can be recovered to cover the losses by the insurance carrier to the insured. 

Also Read: Everything You Should Know About Insurance Fraud Detection

What are the Benefits of Insurance?

There are several roles and importance of insurance. Some of these have been given below:

1. Insurance money is invested in numerous initiatives like water supply, energy, and highways, contributing to the nation's overall economic prosperity.
2. Rather than focusing on a single person or organisation, the danger affects various people and organisations.
3. Insurance protects you and your family from various risks that could otherwise put you or your family in financial jeopardy.
4. It encourages risk control action because it is based on a risk transfer mechanism.
5. Insurance policies can be used as collateral for credit. When it comes to a house loan, having insurance coverage can make obtaining the loan from the lender easier.

Insurance - Tax Benefits 

What are Insurance Benefits as per the Income Tax Act?

Paying taxes is one of the major responsibilities of all citizens. By making the appropriate investments, you can always reduce your tax burden. The Income Tax Act of 1961 provides specific exemptions on qualifying investments for all taxpayers. Tax-advantaged mutual funds, fixed deposits, pension schemes, Public Provident Fund (PPF) schemes, and life insurance policies are examples of these investments.

In addition, the tax department grants particular exemptions for various insurance plans, such as life and health insurance policies. Regardless of the sort of insurance you pick, all insurance plans serve three important objectives as investments. They provide tax benefits, financial security against unforeseen events, and assistance in building your portfolio.

Types of Tax-Deductible Insurance 

In today's world, insurance coverage is a must. And, to boost their value and adaptability, the government provides tax benefits for these insurance plans:

1. Health Insurance Policy
2. Life Insurance Policy

The details for the same has been given below:

Functions of Health Insurance Policy

A health insurance plan is an essential part of your overall insurance strategy.  The function of insurance in health coverage has become more of a necessity than a choice due to escalating medical costs and risk factors. Health insurance products provide financial security for you and your family in the event of a medical emergency. These insurance only provide comprehensive health coverage and do not protect you against any other risks. However, under the Income Tax Act of 1961, even these schemes are eligible for tax exemption.

The tax benefits have been given in the table below:

Specific diseases include cancer, AIDS, chronic kidney failure, neurological issues, hematological disorders, etc. There is a deduction of Rs. 5000 for preventive medical health checkups within limits given above.

Functions of Life Insurance Policy

Life insurance policies are the most common kind of insurance that people purchase to provide financial security for themselves and their families in the case of a future unforeseen occurrence. In this policy, the insurance company agrees to pay your nominee a set amount (also known as the sum assured) if you die during the plan's term. Some insurance plans, such as endowment, money-back, and whole life insurance policies, provide a maturity value benefit if you live to the end of the policy's term. The tax benefits of the life insurance policy have been given below in the table:

Also Read: Which Insurances You Must Have for Your Business?

Conclusion

Every person must take insurance for their well-being. You can choose from the different types of insurance as per your need. It is recommended to have a health or life insurance policy since they prove beneficial in tough times. We hope the article has given insights into what is insurance, the benefits of Insurance, the functions of insurance, including the primary functions of insurance and the secondary functions of insurance, and the tax benefits relating to Insurance.

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