Benefits of Insurance

Benefits of Insurance

The very many benefits provided by insurance include :

• Payment for the costs of covered losses
• Reduction of the insured’s financial uncertainty
• Loss control activities of insurance companies
• Efficient use of resources
• Support for credit
• Satisfaction of legal requirements
• Satisfaction of business requirements
• Source of investment funds
• Reduction of social burdens

Payment for Losses

The primary role of insurance is to indemnify individuals, families and businesses that incur losses. When an insurance company pays an insured for a loss, the company has indemnified the insured.

To indemnify means after a loss to restore the insured in the same financial position as he had enjoyed immediately before the loss.

Reduction of Uncertainty

Because insurance provides financial compensation when covered losses occur, it greatly reduces the uncertainty created by many loss exposures.

A family’s major financial concerns, for instance, would probably center around the possibility of a breadwinner’s death or the destruction of a home. When such an uncertainty is transferred to an insurer, the family practically eliminates these concerns.

Insurance companies have greater certainty than individuals about losses, because the law of large numbers enables them to predict the number of losses that are likely to occur and the financial effects of those losses.

Loss Control Activities

Insurance companies often recommend loss control practices that people and business can implement.

Loss control means taking measures to prevent some losses from occurring or to reduce the financial consequences of losses that do occur.

Individuals, families, and businesses can use measures such as burglar alarms, smoke alarms, and deadbolt locks to prevent or reduce losses.

Loss control generally reduces the amount of money insurers must pay in claims.

Efficient Use of Resources

It is a common practice that individuals and business organizations set aside a certain amount from their income to face future uncertainties. By transferring such uncertainties to the insurers they can use such reserves for further development by individuals and business organizations, in exchange for a relatively small premium.

Support for Credit

Before advancing a loan for purchase of any property, lender wants assurance that the money will be repaid. Insurance makes loans to individuals and businesses possible by guaranteeing that the lender will be paid if the collateral for the loan (such as house or a commercial building) is destroyed or damaged by an insured event, thereby reducing the lender’s uncertainty.

Satisfaction of Legal Requirements

Insurance is often used or required to satisfy legal requirements. In many states, for example, automobile owners must prove they have auto liability insurance before they can register their autos. All states have laws that require employers to pay for the job related injuries or illnesses of their employees and employers generally purchase workers compensation insurance to meet this financial obligation.

Satisfaction of Business Requirements

Certain business relationships require proof of insurance. For example, building contractors are usually required to provide evidence of liability insurance before a construction contract is granted.

In fact, almost any one who provides a service to the public, from an architect to a tree trimmer might need to prove that he or she has liability insurance before being awarded a contract for services.

Source of Investment Funds

One of the greatest benefits of insurance is that it provides funds for investment. When insurers collect premiums, they do not usually need funds immediately to pay losses and expenses. Insurance Companies use some of these funds to provide loans and make other investments, which is helpful for economic growth and job creation. Moreover additional income generated by the insurers helps to keep insurance premium at reasonable levels.

Reduction of Social Burdens

Uncompensated accident victims can be a serious burden to society. Insurance helps to reduce this burden by providing compensation to such injured persons. Examples of such insurances are auto insurance, workmen’s compensation insurance, etc.,

Without insurance, victims of job-related or auto accidents might become a burden to society and need some form of state welfare.

FUNDAMENTALS OF INSURANCE