10 Benefits of Insurance

To summarise the benefits of insurance in 10 short liners is indeed a Herculean task — the list
below may not adequately capture the enormous advantages of buying an insurance policy but it
will go a long way in giving an idea of what Insurance offers to a starter.

No one looks forward to losses but losses occur and we have no control over many unfortunate
incidents. Hence, it is only wise to get covered when life comes forth with its negatives.

Collated below are some of the 10 Benefits of Insurance we think you might find useful:

1. Insurance Covers Losses: Life is filled with uncertainties, hence when the worse
happens, Insurance comes forth to cover losses insulating you against the shocks of
losses.

2. Financial Stability: Relevant insurance policies guarantee financial stability for a

policyholder — monies that could have been expended by a policyholder due to loss is taken
care of by the insurer.

3. Provision of Economic Protection: It protects you against unexpected losses that can affect
your finances.

4. Maintains Standard of Living: Insurance gives you a level of protection that ensures you
maintain your standard of living.

5. Grants/Loan: The insurance policy can be used to apply for loan as a security

6. Protects Against Tragedy: Events such as flood and fire caused by lightning which are not
caused by humans can also be protected with insurance.

7. Confidence: With insurance, you have a certain level of peace of mind that your future is
guaranteed against unexpected loss.

8. Recognized By The Law: Some government policies/regulations required having insurance.

A good example is a compulsory Third-Party Motor Insurance.

9. Eliminates Dependency: Life insurance policies help family to move on with financial
support after the demise of the breadwinner.

10. Tax Benefits: Certain policies can have tax relief that the insured can benefit.

Meaning and Principles of Insurance forms an important part of the general awareness section of
various competitive exams.

1
1.

What is Insurance?
Represented in a form of policy, Insurance is a contract in which the individual or an entity gets
the financial protection, in other words, reimbursement from the insurance company for the
damage (big or small) caused to their property.

The insurer and the insured enter a legal contract for the insurance called the insurance policy
that provides financial security from the future uncertainties.

In simple words, insurance is a contract, a legal agreement between two parties, i.e., the
individual named insured and the insurance company called insurer. In this agreement, the
insurer promises to help with the losses of the insured on the happening contingency. The
insured, on the other hand, pays a premium in return for the promise made by the insurer.

The contract of insurance between an insurer and insured is based on certain principles, let us
know the principles of insurance in detail.

Principles of Insurance
The concept of insurance is risk distribution among a group of people. Hence, cooperation
becomes the basic principle of insurance.

To ensure the proper functioning of an insurance contract, the insurer and the insured have to
uphold the 7 principles of Insurances mentioned below:

1. Utmost Good Faith

2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization

Let us understand each principle of insurance with an example.

Principle of Utmost Good Faith

2
The fundamental principle is that both the parties in an insurance contract should act in good
faith towards each other, i.e. they must provide clear and concise information related to the terms
and conditions of the contract.

The Insured should provide all the information related to the subject matter, and the insurer must
give precise details regarding the contract.

Example – Jacob took a health insurance policy. At the time of taking insurance, he was a
smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the Insurance
company will not be liable to bear the financial burden as Jacob concealed important facts.

Principle of Proximate Cause

This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle applies
when the loss is the result of two or more causes. The insurance company will find the nearest
cause of loss to the property. If the proximate cause is the one in which the property is insured,
then the company must pay compensation. If it is not a cause the property is insured against, then
no payment will be made by the insured.

Example –

Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be
demolished. While demolition the adjoining building was damaged. The owner of the adjoining
building claimed the loss under the fire policy. The court held that fire is the nearest cause of loss
to the adjoining building, and the claim is payable as the falling of the wall is an inevitable result
of the fire.

In the same example, the wall of the building damaged due to fire, fell down due to storm before
it could be repaired and damaged an adjoining building. The owner of the adjoining building
claimed the loss under the fire policy. In this case, the fire was a remote cause, and the storm was
the proximate cause; hence the claim is not payable under the fire policy.

Principle of Insurable interest

This principle says that the individual (insured) must have an insurable interest in the subject
matter. Insurable interest means that the subject matter for which the individual enters the
insurance contract must provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss.

Example – the owner of a vegetable cart has an insurable interest in the cart because he is
earning money from it. However, if he sells the cart, he will no longer have an insurable interest
in it.

To claim the amount of insurance, the insured must be the owner of the subject matter both at the
time of entering the contract and at the time of the accident.

3
Principle of Indemnity

This principle says that insurance is done only for the coverage of the loss; hence insured should
not make any profit from the insurance contract. In other words, the insured should be
compensated the amount equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same financial position as he
was before the loss occurred. Principle of indemnity is observed strictly for property insurance
and not applicable for the life insurance contract.

Example – The owner of a commercial building enters an insurance contract to recover the costs
for any loss or damage in future. If the building sustains structural damages from fire, then the
insurer will indemnify the owner for the costs to repair the building by way of reimbursing the
owner for the exact amount spent on repair or by reconstructing the damaged areas using its own
authorized contractors.

Principle of Subrogation

Subrogation means one party stands in for another. As per this principle, after the insured, i.e. the
individual has been compensated for the incurred loss to him on the subject matter that was
insured, the rights of the ownership of that property goes to the insurer, i.e. the company.

Subrogation gives the right to the insurance company to claim the amount of loss from the third-
party responsible for the same.

Example – If Mr A gets injured in a road accident, due to reckless driving of a third party, the
company with which Mr A took the accidental insurance will compensate the loss occurred to
Mr A and will also sue the third party to recover the money paid as claim.

Principle of Contribution

Contribution principle applies when the insured takes more than one insurance policy for the
same subject matter. It states the same thing as in the principle of indemnity, i.e. the insured
cannot make a profit by claiming the loss of one subject matter from different policies or
companies.

Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and with
company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can claim the
full amount from Company A but then he cannot claim any amount from Company B. Now,
Company A can claim the proportional amount reimbursed value from Company B.

Principle of Loss Minimisation

4
This principle says that as an owner, it is obligatory on the part of the insurer to take necessary
steps to minimise the loss to the insured property. The principle does not allow the owner to be
irresponsible or negligent just because the subject matter is insured.

Example – If a fire breaks out in your factory, you should take reasonable steps to put out the
fire. You cannot just stand back and allow the fire to burn down the factory because you know
that the insurance company will compensate for it.

There are two broad categories of insurance:

1. Life Insurance
2. General insurance

Life Insurance – The insurance policy whereby the policyholder (insured) can ensure financial
freedom for their family members after death. It offers financial compensation in case of death or
disability.

While purchasing the life insurance policy, the insured either pay the lump-sum amount or
makes periodic payments known as premiums to the insurer. In exchange, of which the insurer
promises to pay an assured sum to the family if insured in the event of death or disability or at
maturity.

Depending on the coverage, life insurance can be classified into the below-mentioned types:

 Term Insurance: Gives life coverage for a specific time period.

 Whole life insurance: Offer life cover for the whole life of an individual
 Endowment policy: a portion of premiums go toward the death benefit, while the
remaining is invested by the insurer.
 Money back Policy: a certain percentage of the sum assured is paid to the insured in
intervals throughout the term as survival benefit.
 Pension Plans: Also called retirement plans are a fusion of insurance and investment. A
portion from the premiums is directed towards retirement corpus, which is paid as a
lump-sum or monthly payment after the retirement of the insured.
 Child Plans: Provides financial aid for children of the policyholders throughout their
lives.

General Insurance – Everything apart from life can be insured under general insurance. It offers
financial compensation on any loss other than death. General insurance covers the loss or
damages caused to all the assets and liabilities. The insurance company promises to pay the
assured sum to cover the loss related to the vehicle, medical treatments, fire, theft, or even
financial problems during travel.

General Insurance can cover almost anything, and everything but the five key types of insurances
available under it are –

5
  Health Insurance: Covers the cost of medical care.
 Fire Insurance: give coverage for the damages caused to goods or property due to fire.
 Travel Insurance: compensates the financial liabilities arising out of non-medical or
medical emergencies during travel within the country or abroad
 Motor Insurance: offers financial protection to motor vehicles from damages due to
accidents, fire, theft, or natural calamities.
 Home Insurance: compensates the damage caused to home due to man-made disasters,
natural calamities, or other threats

Benefits of Insurance

The insurance gives benefits to individuals and organisations in many ways. Some of the benefits
are discussed below:

1. The obvious benefit of insurance is the payment of losses.

2. Manages cash flow uncertainty when paying capacity at the time of losses is reduced
significantly.
3. Complies with legal requirements by meeting contractual and statutory requirements, also
provides evidence of financial resources.
4. Promotes risk control activity by providing incentives to implement a program of losing
control because of policy requirements.
5. The efficient use of the insured’s resources. It provides a source of investment funds.
Insurers collect the premiums and invest those in a variety of investment vehicles.
6. Insurance is support for the insured’s credit. It facilitates loans to organisations and
individuals by guaranteeing the lender payment at the time when collateral for the loan is
destroyed by an insured event. Hence, reducing the uncertainty of the lender’s default by
the party borrowing funds.
7. It reduces social burden by reducing uncompensated accident victims and the uncertainty
of society.