Exploring Key Functions of Insurance: Definition, Types, and Benefits

Insurance is the safety umbrella to support financially during any unprecedented emergency. Typically, it is not just the first step to safety but essentially shields the savings of the insured. Let’s explore more on insurance, its types and functions here.

What is Insurance?

Insurance definition implies a legal contract created between 2 specific parties – the insurance company (insurer) and the interested individual or a group of people (insured or policyholder). This legal contract is known as the insurance policy which is a document that ensures coverage support to the insured during any unprecedented event mentioned in the insurance policy in exchange of a sum paid (premium) either monthly, quarterly or annually. The fundamental mechanism around the benefits of insurance is a conscious individual would opt for paying small amounts over losing large sums of money to resolve the unexpected crisis. This is applicable for different situations in health, business, vehicle, and several such other domains of life depending on the probability of risks for an unexpected and unfavourable event. So, insurance implies not just building a safety net to secure the future but also ensures the savings for different goals remain intact.

Key Functions of Insurance

The insurance policy acts as a support for the uncertain and unknown future to the insured. The insurer or insurance company commits to following the contract (insurance company) and compensate for any losses occurred when signing the contract with the policyholder. Let’s explore the different functions of insurance as follows:

Safety and Security of the Insured

The insurance policy is a safety net for the insured during any emergency crisis of health or accidents. The insurance policy supports the policyholders to chalk down certainty with inclusions in financial planning. The insurers cannot prevent any accidents or crisis but can support the insured with required financial security to sail through the crisis. For instance, health insurance provides cover for any health emergency and supports the costs incurred in hospitalization and treatment for ailments.

Protecting the insured’s dependents

One of the key functions of insurance is to support not just the insured but also the dependents. This includes not just health insurance policy but also secure the uncertain future. For instance, with policies like Personal Accident cover, the insured safeguards the future of the dependents by keeping them financially secure with coverage for medical treatment and hospitalization when suffering after a severe accident. Further, in cases when the insured dies or suffers through temporary or permanent partial or complete disability, the insurer provides a lump-sum amount to support the expenses and also has expenses for children’s education based on the policy.

Collective risks

The insured after buying an insurance policy, gives the insurer the responsibility of risks and their probability of occurrence. This as one of the functions of insurance works on the principle that not all the insured will face a particular risk simultaneously. For example, if a group of 100 businesses buy fire insurance for their property in Q4 of 2024 for a tenure of one year, it is unlikely that all the 100 companies will have a fire accident till Q4 of 2025. So, the cost to settle one claim is indirectly settled by the premium paid by different insurance companies.

Enhances the growth of large corporations

With large organizations being highly vulnerable to unprecedented risks such as employee dishonesty, cyber attacks, theft, or even natural disasters such as floods, tempests, storms, cyclones, or even strikes, vandalism, riots, etc., there could be a significant impact the operational continuity. The function of insurance is to secure the growth of large corporations through such unprecedented crises and encourage them to make risky decisions.

Prevents losses

The insurer gives the businesses the leverage to control the losses or compensate for the losses in case of any unprecedented emergency. The key function of insurance here is to support and cover the fundamental expenses and have operational resilience when working in a high-risk environment where losses can cause a detrimental effect. Insurance facilitates the insured to cover higher probabilities of risk by payout of a small premium annually.

Enhance security with certainty

One of the main functions of insurance is to shield the insured with a safety net and instill certainty amid uncertain times with financial security. For instance, with PA cover, the insured gets financial security even after the accident causes disability or death, creating certainty during such a high-risk environment.

Types of Insurance

What are the 4 Types of Insurance?

• Life Insurance

Life insurance is one of the 4 types of insurance policies that can safeguard the family members of the insured in case of the untimely demise of the insured during the policy tenure. The coverage for life insurance can also be given to the insured after a certain time period as agreed in the insurance policy contract. Life insurance coverage offers required financial security to the dependents of the insured and helps manage routine expenses along with education and EMI payments

• Health Insurance

From the different types of insurance policies, health insurance is essential as it supports coverage for hospitalization along with medical treatment which also includes surgeries and expert intervention. The health insurance can be corporate health insurance provided by the employer as a part of employee wellness benefits, or can be a personal insurance plan with coverage for a single person or family floater which provides cover for treatment of family members with specific policy premium, senior citizen health insurance tailored for individuals over 60 years or critical illness insurance.

• Property Insurance

Property insurance is a type of insurance policy that can be used for both residential and commercial properties to protect the structure and contents from any damages caused by external or natural factors. This includes unexpected theft, burglary, fire, vandalism or any other natural disasters like floods, storms, etc. The property insurance ensures operational continuity for companies even when valuable items are lost and supports them in securing their finances.

• Liability Insurance

Liability insurance provides coverage for legal expenses in case of any claims issued on physical or bodily injury to a person or property damage of another individual. Generally, all businesses have third-party liability insurance to cover for any bodily injury or property damage induced by the regular business operations. This policy provides complete financial security against legal disputes.

• Motor Insurance

Motor insurance, also known as vehicle insurance, is a type of general insurance policy that secures the vehicles from any damage caused due to accidents or theft and even covers any damages caused to an external individual or property due to the vehicle. In India, Motor insurance typically consists of third party protection which is mandatory as per the Indian guidelines and comprehensive protection of the vehicle.

Benefits of Insurance

The insurer provides the required financial security against any unprecedented risks making it an essential tool during any unexpected crisis. One of the main functions of insurance is to protect the financial interests of the family during the absence of the insured. Some of the benefits of insurance policies are as follows:

• Ensures financial security: With an insurance policy, the insured secures the life of the beneficiaries in the event of any unprecedented health emergency or unexpected accidents and builds a safety net which assures financial security during crisis situations. With insurance policies such as life insurance, term insurance, etc. the insured can support the beneficiaries in the event of any accident, ailment or death.
• Risk management: Insurance policy acts as a risk management tool for businesses to secure their operations in the event of crisis or accident such as theft, fire, burglary, vandalism, or natural disasters causing losses to the residential or commercial property and contents.
• Tax Deductions: The insurance premium paid for health insurance can be claimed under Section 80C of the Income Tax Act, whereas, the employers can claim their premium paid for corporate health insurance as a business expense under Section 19 D.
• Access to health-related or wellness benefits: Health insurance policies focused on treatment and recovery options could also provide access to other wellness benefits that might support building the overall mental, physical and emotional health of the insured and his/her dependents.
• Investment option: One of the benefits of an insurance policy is some of these policies such as life insurance would provide a savings component that accumulates cash value over the specific time period, making it a financial resource.

The Role of Insurance in Modern Society

The modern society has a strong backbone in materialistic approaches and sustainability. Insurance is one of the best tools for risk management when it comes to securing both businesses and individuals from any projected or predicted crises that can occur in unexpected ways. The insurance policy provides safety and security to the insured and his/her dependents. But, the core concept here is insurance also resolves the psychological discomfort caused due to the fear of uncertainty and financial stability due to health-related crisis, or accidents affecting the operational costs of the business.

Conclusion

The insurance policy is a legal contract binding the insurance company with the insured or policyholder which assures the insurer will provide the required financial security in case of any emergency for health, motor, life, etc., and create certainty amid uncertain and crisis situations. The insurance premium is a small fee paid by the insured to share the risk probability with several businesses or individuals along with the insurer.