Insurance : Meaning, Important, Working System and Cost

Introduction to Insurance

Imsurance : Meaning, Important, Working System and Cost

Nowadays Insurance has become the fundamental aspect of modern human life as it provides financial protection against uncertainty. Individuals, Businesses, and societies are benefited by Insurance as insurance is based on the principle of Indemnity. It means it brings them to the same financial position even if loss happened due to covered causes. Understanding about Insurance is necessary and crucial for the people to make their life safe. In this article we will discuss about the meaning of Insurance and its important, how does it work, and how much it costs.

What is Insurance ?
Insurance is a contract between insurance company, also known as insurer and individual customer called insured in which insured periodically pays payment (premium) for transferring his/her potential risks to the insurance company. It is a legal agreement between policyholder and the insurance company. It is the best way to protect the life financially.

Why it is important ?
There are a lots of direct and indirect benefits of Insurance. Here we only discuss four key benefits of  insurance.
1. Financial Protection
Insurance provides financial protection to you and your family. In case of Non life insurance, insurance helps you to indemnify when loss occured. It means it helps to bring you to the previous financial position even if loss happened. In case of Life insurance, it helps to your family by providing financial support after your death within maturity period. It also provides cash value to the insured if you are alive until maturity of the policy.

2. Saving
Life Insurance has saving component also.
The premium you paid on life insurance includes risk management cost and saving component. If you are still alive untill maturity of the policy, you will get sum insured amount   as well as dividend accumulated to your account untill maturity of the policy. So it is a kind of saving. If you surrender the policy before maturity, you will get your premium contribution as well as dividend accumulated to your account till that period.

3. Peace of Mind
Insurance provides peace of mind in the sense that you are known that your risks are covered by insurance. It helps to reduce your fair, anxiety and worry about your unexpected loss. You are able to focus on your goal or job. In case of Life Insurance, You do not have to worry about who will look after your family after your death.

4. Tax relief
Insurance provides tax advantages to the individual. In different kind of endowment life insurance policies provide tax benefit to the individual. This means you don't have to pay tax on that money you paid to the insurance company as a premium. For example : If your annual income is 50 million and you have to pay 1 million life inaurance premium,  then the taxable income will be 49 million only.

How does Insurance work ?
Insurance is the risk transfer mechanism. Many individuals, businesses transfer their risk to the insurance company. Then question may arised, How does insurance ready to take the others' risk ?
Actually Insurance works on the principle of law of large number. According to his principle, as much as the number of participants in an insurance pool increases, the insurance company can more accurately  predict the frequency and severity of losses. This allows insurance company to predict the average loss based on the historical data and probability of loss calculations.
There is almost zero chance of happening loss of insured property simultaneously. Insurance company collects the money as the premium from the policyholder which is the main source of revenue of insurance company. They invest that money in different sectors such as bond, debenture, stock, real estate, and other financial instruments and enjoy the return from that investments. They provide compensation from the money collected and returned from investment.
Overall, The insurance works on the basis of  pooling risks, collection of premiums, investment of those premiums to generate extra income, using of these money to pay the valid claim.

How much it cost ?
There are different kinds of insurance such as home insurance, health insurance, auto insurance, life insurance etc. The premium of each kinds of insurance is different from each other. The cost of insurance is not fixed and depends on various factors. The premium of the policy are based on several factors such as type of insurance policy, the risk profile of the prospective insured, and the coverage limits. In case of Life insurance, basically type of life insurance, motality rate, age, and sum insured or Face value of the policy are the key factors that affect the premium determination.

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