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written by Khatabook | November 22, 2021

Insurance- Functions, Benefits & How it Works

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Table of Content


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 e ach 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 k ey 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 b asic 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 f or 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: Penalty for Late Filing of Income Tax Return

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:

Section Number

Insured Person

Deduction Amount

Section 80D

Individuals and their family (Age less than 60 years)

Up to Rs. 25,000

Section 80D

Individuals and their family plus parents (Age less than 60 years)

Total Up to Rs. 50,000 (25,000+ 25,000)

Section 80D

Individuals and their family plus parents (Age more than 60 years)

Total Up to Rs. 75,000 (25,000 +50,000)

Section 80D

Individuals and their family(Anyone above 60 years of age) plus parents (Age more than 60 years)

Total Up to Rs. 100,000 (50,000+ 50,000)

Section 80U

Individual with disability

Up to Rs. 75,000

If the disability is severe, then up to Rs. 1,25,000

Section 80DD

Any dependent family member with a disability

Up to Rs. 75,000

If the disability is severe, then up to Rs. 1,25,000

Section 80DDB

Individual or dependent family member (below the age of 60 years) with a specific disease

Upto Rs. 40,000

Section 80DDB

Individual or dependent family member (above the age of 60 years) with a specific disease

Upto Rs. 1,00,000

Specific diseases include cancer, AIDS, chronic kidney failure, neurological issues, haematological 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:

Section Number

Benefits

Section 10(10D)

The amount you receive from the insurance company is excluded from income tax under this provision, subject to certain limitations. The total assured, bonus, maturity value, surrender value, and death benefit are all excluded from the tax.

Section 80C

All types of life insurance policies are available for tax exemption under the Income Tax Act. The benefit is received on the life insurance policy, whole life insurance plans, endowment plans, money-back policies, term insurance, and Unit Linked Insurance Plans. The maximum deduction available will be Rs. 1,50,000. The exemption is provided for the premium paid on the policies taken for self, spouse, dependent children, and dependent parents.

Section 80CCC

This provision exempts any sum put into a Life Insurance Corporation of India or other insurance company's annuity plan to secure a pension. This provision also allows for a maximum deduction of 1.5 lakhs.

Also Read: Know About Section 43B in Income Tax Act 1961

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.

Download the Khatabook app to know more about Insurance.

FAQs

Q: What is the maximum deduction available under Section 80C of the Income Tax Act?

Ans:

The maximum deduction available under Section 80C of the Income Tax Act is Rs. 1,50,000.

Q: What are the two types of Insurance for which tax benefits are available under the Income Tax Act?

Ans:

Life Insurance Policies and Health Insurance Policies are two types of Insurance for which tax benefits are available under the Income Tax Act.

Q: What are some of the benefits of Insurance?

Ans:

Two benefits of Insurance have been given below. For remaining, benefits refer to the article above.

  • Insurance protects you and your family from various risks that could otherwise put you or your family in financial jeopardy.
  • 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.

Q: Which are the two types of functions of Insurance?

Ans:

The functions of Insurance are divided into two types, namely the Primary Functions of Insurance and Secondary Functions of Insurance. The details regarding both types have been given above. 

Q: What is Insurance?

Ans:

The insurance firm (insurer) and the individual enter into a legal agreement known as insurance (insured). In this case, the insurance company guarantees to compensate the insured for any losses incurred due to the covered contingency occurring.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.