Importance and Benefits of Insurance

IMPORTANCE AND BENEFITS OF INSURANCE:
Importance:
1. Security and Safety: It gives a sense of security and safety to the businessman. It
enables him to receive compensation against actual loss. He can concentrate on his
business with a secure feeling that in case of losses arising from insurable risk, his
losses will be compensated.
2. Distribution of risk: Risk in insurance is spread over a number of people rather

being concentrated on a single individual.
3. Normal expected profit: An insured trader can enjoy normal margin of profit all
the time. He is protected from unexpected losses because of insurance.
4. Easy to get loans: A trader can get bank loans easily if his stock or property is
insured, as insurance provides a sense of security to the lenders.
5. Advantages of Specialization: Businessmen can concentrate on their business

activities without spending more time on safeguarding their property. The
insurance companies, on the other hand, can provide specialized insurance
services.
6. Development of Social Sectors: Insurance funds are available for economic

development particularly for the development of social sectors. Especially for a
developing country like India, insurance funds are an important source for
investing in infrastructure projects (roads, power, water supply, telecom etc).
7. Social cooperation: The burden of loss is shouldered by so many persons. Thus,

insurance provides a form of social cooperation.
Benefits of Insurance:
Insurance is important because both human life and business environment are
characterized by risk and uncertainty. Insurance plays a key role in mitigation of
risks. The benefits of insurance are discussed below:
Benefits of Insurance to insured:
1. Insurance provides security against risk and uncertainty.
2. It enables the insured to concentrate on his work without fear of loss due to risk
and uncertainty.
3. It inculcates regular savings habit, as in the case of life insurance.
4. The insurance policy can be mortgaged and funds raised in case of financial
requirements.
5. Insurance policies, especially pension plans provide for income security during
old age.
6. The insured gets tax benefits for the amount of premium paid.
7. Insurance of goods may be a mandatory requirement in certain contracts.
Benefits of Insurance to society:
1. Insurance is an important risk mitigation device.
2. Insurance companies provide the required funds for infrastructure development.
3. It provides a sense of security.
4. Insurance provides security to the insured during his life and to his dependents.
5. It provides employment opportunities. With the entry of private insurers

employment opportunities have increased greatly.
6. Insurance provides a sense of livelihood to those who might otherwise not have
an income source — housewives, retired people, students etc can work as agents
and earn commission.
7. Insurance works on the principle of pooling of risks and distributes risks over
many people.
8. Insurance is an invaluable aid to trade.
Benefits of Insurance to the Nation:
1. Insurance provides 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 in India).
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 Indian capital
markets. Such investments develop the capital market.
Importance of Insurance to a Business
Insurance is a form of risk management primarily used to hedge against the risk of
potential financial loss.
Again insurance is defined as the equitable transfers of the risk of a potential loss,
from one entity to another, in exchange for a premium and duty of care.
The insurance has been useful to the business society also.
Importance of insurance to a business is;
1. The uncertainty of business losses is reduced.
2. Business efficiency is increased with insurance.
3. Keyman indemnification.
4. Enhancement of credit.
5. Business continuation.
6. The welfare of employees.
Some of the uses are discussed below:
1. The uncertainty of Business Losses is Reduced
In the world of business, commerce, and industry a huge number of properties are
employed.
With a slight slackness or negligence, the property may be turned into ashes. The
accident may be fatal not only to the individual or property but to the third party
also.
New construction and new establishment are possible only with the help of
insurance, in absence of it, uncertainty will be to the maximum level and nobody
would like to invest a huge amount in the business or industry.
A person may not be sure of his life and health and cannot continue the business up
to a longer period to support his dependents.
By purchasing a policy, he can be sure of his earning because the insurer will pay a
fed amount at the time of death.
Again, the owner of a business might foresee contingencies that would bring great
loss. To meet such situations they might decide to set aside annually a reserve, but
it could not be accumulated due to death.
However, by making an annual payment, to secure immediately, insure policy can

be taken.
2. Business Efficiency is Increased with Insurance
When the owner of a business is free from the botheration of losses, he will
certainly devote much time to the business. The carefree owner can work better for
the maximization of the profit.
The new, as well as old businessmen, are guaranteed payment of a certain amount
with the insurance policies at the death of the person; at the damage, destruction or
disappearance of the property or goods.
The uncertainty of loss may affect the mind of the businessmen adversely. The
insurance, removing the uncertainty, stimulates the businessmen to work hard.
3. Key Man Indemnification
The key man is that particular man whose capital, expertise, experience, energy,
ability to control, goodwill and dutifulness make him the most valuable asset in the
business and whose absence will reduce the income of the employer tremendously
and up to that time when such employee is not substituted.
The death or disability of such valuable lives will, in many instances, prove a more
serious loss than that by fire or any hazard.
The potential loss to be suffered and the compensation to the dependents of such
an employee requires an adequate provision that is met by purchasing adequate
life-policies.
The amount of loss may be up to the amount of reduced profit, expenses involved
in the appointing of such persons and payment to the dependents of the key man.
The Term Insurance Policy or Convertible Term Insurance Policy is more suitable
in this case.
4. Enhancement of Credit
The business can obtain a loan by pledging the policy as collateral for the loan.
The insured persons are getting more loans due to the certainty of payment at their
deaths.
The amount of loan that can be obtained with such pledging of policy, with
interest, thereon will not exceed the cash value of the policy.
In the case of death, this value can be utilized for setting the loan along with the
interest.
If the borrower is unwilling to repay the interest, the lender can surrender the
policy and get the amount of loan and interest thereon paid.
The redeemable debentures can be issued on the collateral of capital redemption

policies. The insured properties are the best collateral and adequate loans are
granted by the lenders.
5. Business Continuation
!n any business particularly partnership business may discontinue at the death of

any partner although the surviving partners can restart the business, in both the
cases the business and die partners will suffer economically.
The insurance policies provide adequate funds at the time of death. Each partner
may be insured for the amount of his interest in the partnership and his dependents
may get that amount at the death of the partner.
With the help of property insurance, the property of the business is protected
against disasters and the chance of disclosure of the business due to the tremendous
waste or loss.
6. Welfare of Employees
The welfare of employees is the responsibility of the employer. The former is

working for the latter.
Therefore, the latter has to look after the welfare of the former which can be
provided for early death, provision for disability and provision for old age.
These requirements are easily met by the life insurance, accident and sickness
benefit, pensions which are generally provided by group insurance.
The premium for group insurance is generally paid for by the employer. This plan
is the cheapest form of insurance for employers to fulfill their responsibilities.

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IMPORTANCE AND BENEFITS OF INSURANCE:

2. Distribution of risk: Risk in insurance is spread over a number of people rather

5. Advantages of Specialization: Businessmen can concentrate on their business

6. Development of Social Sectors: Insurance funds are available for economic

7. Social cooperation: The burden of loss is shouldered by so many persons. Thus,

Benefits of Insurance to insured:

1. Insurance provides security against risk and uncertainty.

3. It inculcates regular savings habit, as in the case of life insurance.

7. Insurance of goods may be a mandatory requirement in certain contracts.

Benefits of Insurance to society:

1. Insurance is an important risk mitigation device.

2. Insurance companies provide the required funds for infrastructure development.

3. It provides a sense of security.

5. It provides employment opportunities. With the entry of private insurers

8. Insurance is an invaluable aid to trade.

Benefits of Insurance to the Nation:

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

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

5. Insurance companies pay taxes out of profits earned. This is an important

6. Insurance companies are permitted to invest 5% of the funds in the capital

The insurance has been useful to the business society also.

Importance of insurance to a business is;

1. The uncertainty of business losses is reduced.

2. Business efficiency is increased with insurance.

6. The welfare of employees.

Some of the uses are discussed below:

1. The uncertainty of Business Losses is Reduced

However, by making an annual payment, to secure immediately, insure policy can

2. Business Efficiency is Increased with Insurance

3. Key Man Indemnification

The redeemable debentures can be issued on the collateral of capital redemption

!n any business particularly partnership business may discontinue at the death of

The welfare of employees is the responsibility of the employer. The former is

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