Importance of Insurance

Why is it important to have Insurance ? 


Insurance is a safety arrangement for unexpected problems like health issues or accidents. Insurance can be defined as a financial arrangement which provides protection against financial losses and uncertainties in exchange for regular premium payments.

It is a contractual agreement between two parties i.e. individual/entity and an insurance company. In this agreement, an individual or entity pays a regular premium to the insurance company and in return the insurance company takes the responsibility for specified risks, covering potential losses, damages, or liabilities as outlined in the respective insurance policy.


Insurance is also considered as a risk management tool as it spreads the financial risk of unforeseen events. Insurance also reduces the burden of unexpected losses and liabilities and helps policyholders in dealing with staggering events like accidents, sickness and damages.

Some of the basics terminologies related to Insurance are:

PremiumsIt is the regular payments made by the insured or policy holder to the insurer or insurance company in exchange of the insurance policy and its coverage. 
PolicyIt is a legal contract which includes all the terms and conditions about the insurance. Along with this it also provides the coverage details upon which insured and insurer have agreed upon. It is a legal tender.
CoverageThis reflects the extent to which the policy protects the insured. This refers to the nature of risks the insurance policy covers in detail.
Risk AssessmentIt is a due diligence by the insurer to evaluate the risk associated with the insured. This is done to determine the insurance premiums.
BeneficiaryBeneficiary is the individual or entity who is designated to receive the insurance claims in the event of the insured’s death.

Importance of Insurance

Insurance provides Financial Protection:

Insurance is crucial for planning your financial safety. Future is uncertain, insurance provides safety against such uncertain events covering the financial losses that could happen from such uncertainties.

Illustration: Consider a vehicle insurance policy. In case of any damage or loss of the vehicle, the insurance would cover the cost of loss or repair. This will ease the financial setback. Similarly, different insurance policies cover different losses and prevent the insured from financial burden.

 Insurance as a Risk Mitigation Tool:

Insurance stands as a fundamental tool for risk mitigation and provides techniques and mechanisms to manage various types of risks. Different insurance policies cover different risks. Insurance policies are tailored in such a way that policyholders could manage the risk associated with their asset or life. 

Illustration: A business insures its business against uncertainties. Sometimes, businesses get sued by the customers for mishandling or injury. In such case, Insurance would cover all the legal expenses and potential damages, protecting the business’ financial stability. 

Insurance encourages Savings and Investments:

There are different insurance policies with different coverage. The premium payments stand as regular forced savings and accumulate cash value over time. Endowment policies and retirement plans by insurance companies encourage long-term planning. Similarly, there are various investment-linked insurance plans where insured allocate the insurance premium on different investment opportunities.

Illustration: A life insurance policy not only secures a family’s financial future in case of death but also accumulates cash that can be used for various purposes. 

Insurance and Healthcare Coverage

Most of the insurance covers health and life. In case of any health emergency, insurance policy helps individuals in managing the high cost of health care. Insurance coverage ensures the cost of health treatment, medication, testing and other medical services without pressing additional financial burden.

Illustration: A medical insurance covers all the expenses during the medical care from treatment to medication to other medical services as per the policy.

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