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What is Insurance? Functions, Benefits & How does It Work?

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There are at least two reasons to buy insurances. First, and most important, is for protection from harm by any catastrophic event. A car accident can lead to consequences such as a serious financial deficiency at the time of an illness or injury, or death. Specially it helps protect against financial losses.

# What is Insurance?

An insurance policy/plan is a legal contract between two parties, the insurance-company (insurer) and the individual (insured). Under the contract, you regularly pay money to the insurer in the form of premiums (which can be scheduled as EMI for auto deduction from your bank account), and they pay you back as an assured amount in an unfortunate situation. In which the insurance-company promises to compensate the financial loss due to contingencies insured in return the premium paid by the insured person. For example, insurance help in times like the insured’s untimely death, accident, or damage to a house, etc.

# Basic Functions Of Insurance

The basic functions of insurances are divided into three categories. These categories are as follows:

  • Primary Functions 

  • Secondary Functions 

  • Other Functions

  • Primary Functions Of Insurance 
  1. Provide safety and security:- Insurance provides financial support and reduces uncertainties in business and human life. It provides safety and security against special incidents. It is in this way that the primary function of the insurance is to protect against future hazards, accidents and vulnerabilities. No insurance can prevent the danger from occurring and prevent future events, however, it can certainly help you by giving some coverage to the misfortune of the danger.

  2. Collective Risks:- Less number of individuals acquire insurance-policy to safeguard from disaster. Be that as it may, not every one of them is constantly exposed to bad luck. In simple terms, the few individuals contribute to insurance and just a few individuals need to spread it. It is a strategy in ways for which countless individuals share a pair of misfortunes. Each general population, who gets protection, contributes by paying an annual premium towards the reserve. Out of which, people suffering from hazards get paid according to the terms of insurance approach, and address their financial needs in that difficult time.

  3. Risk Assessment:- Insurance-organizations determine what the amount of risk is by surveying the various components that climb to give a chance. The premium rate settlement process is also based on the risks involved in the policy.

  4. Certainty:- As we obtain coverage from the insurer, we are secure about our ability to meet future losses with coverage and withstand future threats. In any case, when we get security, it turns our vulnerability into assurance that we can deal with future threats.

  • Secondary Functions Of Insurance
  1. Forestalling Losses:- Insurance cautions people and business people to understand the appropriate gadget for shocking forecast of hazards by following safety guidelines; A programmer helps establish a sparkler or alert framework, and similar damage.

  2. Covering bigger risks with smaller capital:- Insurance melts the specialists of security ventures. You can pay a small premium against big threats and suspicions to eliminate it.

  3. Helps in the development of Greater Industry:- In setting up large industries, there is great potential for hazards. Large enterprises have extended areas of functioning where one sector has no connection with another sector of the same industry now and then. The practices of huge businesses are so widespread that it takes over and seeks to cover each type of threat. It does not come to support these heavy businesses, especially against the perceptible threat, besides helping to develop them. This is understandable only because insurance gives the opportunity to build large enterprises that have more risks in their setup.

  • Other Functions Of Insurance
  1. Insurance is a tool of investment and savings:- By purchasing any insurance policy, it is promoted by the manufacturer to make an installment of the insurance-system. This is a surprisingly beneficial turn of events.

  2. This is one of the sources of winning foreign exchange:- A flight insurance through Air is needed. While on a ship, people know whether they need marine insurance or not. Simply put, insurances has turned into a global business and is a necessary addition.

  3. Subrogation:- In its most common usage situations, in which an insurance-organization tries to recover costs for a case when the second assembly is charged with paying another rate, a bit of that assurance.

# Types of Insurance 

These are the types-

  • Life-insurance:- It is a contract between an individual and an insurance-provider, in which the insurer provides financial security to the policyholder in exchange for a monthly fee. Depending on the life-insurance regime, in the event of the death of the policyholder or, if the policy matures, the insurance-provider pays the amount to his family or some other designated beneficiaries after a certain time.

  • Health-insurance:- Uncertainty of health is part of life. Keeping in mind the rising cost of healthcare and increasing number of diseases, it is necessary to have a financial pillow to protect oneself against health contingencies. There are several types of health-insurance policies such as individual, family floater, critical illness health-insurance and senior citizen health-insurance. It is important to have adequate health-insurance coverage that can protect you from financial crisis during the event of a medical condition.

  • Motor-insurance:- It policy in India is legally required for every vehicle owner under the Motor Vehicles Act. Be it a two-wheeler, car or commercial vehicle, it is mandatory to take advantage of third party liability motor-insurance to protect yourself from claims arising from the other party during the accident. However, motor-insurance policies come in a comprehensive package. In which your valuable property (bike or car) is covered with various risks of damage or loss with personal accidental cover for you as the owner. Keeping in mind the increasing incidence of road accidents and asset value, having a comprehensive motor-insurance policy is of paramount importance.

  • Home-insurance:- The house is one of your most valuable assets which also has many valuable items and memories. Although you try to protect it completely, your property is exposed to various risks such as theft, damage caused by natural disasters, etc., which you cannot fully mitigate. Therefore, to protect your home from damage that can be caused by many incurable events, so taking advantage of home-insurance is the most effective solution.

  • Travel-insurance:- It can be very much a priority for frequent travelers. However, this is not necessary for everyone. The need for insurance may vary depending on the specific needs of each individual. For example, if you are planning a domestic trip and your comprehensive health-insurance plan covers you across the country for any medical emergency, then travel plans may not be necessary for you. In particular, travel-insurance plans may not be your priority. If you can reduce your prepayment travel expenses. Sometimes travel covers also come as their credit card travel benefits.

  • Education-insurance:- It is a life-insurance policy, designed specifically as a savings tool. An education-insurance can be a great way to provide a lump sum amount when your child reaches the age for higher education and enters college (18 years and over). This fund can be used to fund your child’s higher education. Under this policy, while the foster / legal guardian is the owner of the policy. You can estimate the amount that will go towards higher-education of your children using the education plan calculator.

# Benefits of Insurances

Insurance-policies benefit people as well as society in many ways. Here we will write some benefits-

  • Insurances provides protection from various uncertainties that may put you or your family in financial trouble.

  • Since it operates on a risk transfer mechanism, it promotes risk control activity.

  • As insurance money is invested in various projects like water supply, electricity and roads etc., it contributes to the overall economic growth of the nation.

  • The risk extends to different individuals and organizations rather than focusing on just one.

  • There are credit facilities offered against insurance policies. In the case of a home loan, having insurance-cover can help in getting the loan easily from the lender.

# How does Insurance-Work?

The concept of insurance operates on the basis of ‘risk pooling’. As mentioned above, an insurance-policy is a legal contract that binds both the policyholder and the insurer to each other. It includes all the circumstances under which the insured or policy nominee receives its benefits from the insurer. It is a method by which you can protect yourself and your loved ones from facing financial crises, you buy an insurance-policy for the same. 

When you buy any type of insurance-policy from an insurer for a particular period of time, you will make regular payments for the policy. Similarly, the insurance-company also collects premium from all its customers in the form of sum insured and pools the money collected to pay the losses due to the insured event. If an event occurs with the insured, and you make a claim, the loss will be repaid by the insurer from the policyholders’ pool of premiums. If you do not make a claim during the specified policy period, you will not be given any benefit by the insurance-company.

# What are the Tax Benefits on Insurance?

Apart from the security benefits of policies, you can also avail income tax benefits.

  • Section 80C:- The premium paid to purchase a life insurance-policy is eligible for deduction from taxable income under Section 80C of the Income Tax Act. The upper limit for these deductions is Rs. 1.5 lakh.

  • Section 80D:- The health-insurance premium paid to purchase the policy for himself and his parents is also tax-deductible under Section 80D of the Income Tax Act, 1961.

  • Section 10 (10D):- The life insurance benefits that you or the nominee of an insurance-policy receive from the insurer are exempt from tax under this section.

You can claim these tax benefits while filing your income tax return.

# Conclusion:

Insurances helps you finance your event. Life, travel, home or health-insurances etc., you can buy both online and offline. Agents help you in buying the policy, similarly you can also buy the policy through the websites. Before choosing an insurance-policy and investing, it is important to do research on different plans from different platforms and then make a decision. 

We hope that this blog will give you a better understanding about insurance. Be safe!

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