The most important of all is to save you from potential financial risks, says Naval Goel...
Illustration: Uttam Ghosh/Rediff.com
Insurance and unpredictable situations go hand in hand. People take risks, sometime knowingly and many times without knowing what the outcome would be.
There is always an element of uncertainty; risks can result in gain or losses.
It is to safeguard against this unpredictable nature of life that people opt for insurance as a tool to fall back upon in times of financial and emotional loss. Today, it has become one of the most critical components of financial planning.
The basic objective of opting for insurance is to cover unforeseen risks, which may result in the loss of life and assets.
Insurance is a tool to save oneself from potential financial risks. With the development of the insurance industry, insurance has meant not just a form of protection, but also a type of investment and saving tool.
What is insurance?
Insurance basically means protection against future losses. It can be defined as a form of advance planning by a person to guard against the unexpected possible contingencies, which can arise in the future.
A person can ensure security against unexpected financial losses in exchange of a particular amount called as premium.
In short, insurance is a measure one can take to fight against the financial odds, on the base of a pre-payment.
Technically, procuring protection is a course of action through which an individual manages the potential risk and transfers it efficiently to the structure/company that is capable of handling it.
Why insurance is a need?
A person needs protection through insurance to cover unforeseen risks and ensure financial security.
In the primitive age, it was about getting protection against environmental factors. The need of protection has evolved by multiple folds from then to now.
In today's digital age and fast paced life, it is about getting security against every kind of risk, be it a life or any asset with an insurable interest.
Insurance has become unavoidable because:
It brings a protection element:
The prime purpose of insurance is to avail protection against unforeseen financial contingencies for businesses and humans.
It brings a sense of security. It helps to hedge against the uncertainties of life.
It generates wealth:
Insurance generates resources to save and create wealth, in the long term.
Certain types of life plans act as means to develop a corpus and generate rate of returns. Then these funds are gainfully employed in various government securities and bonds to generate returns.
It brings a disciplined saving approach:
Acquiring coverage calls for a fixed amount to be invested regularly by the policyholder.
This develops a disciplined approach to save as the policyholder is required to compulsorily pay a particular amount as premium, at regular intervals.
It, thus, cultivates a habit of saving, which ultimately helps in developing a corpus, over a period of time.
It supports risk taking capacity:
Insurance coverage, be it for personal or for commercial purposes, supports the risk bearing capacity of individuals and organisations alike.
It enables the person or the management of an organisation to focus on constructive activities with the hope that any kind of financial loss will be taken care of by the insurer.
It brings social stability for individuals:
In absence of a social security schemes in India, protection policies become all the more significant.
Insurers provide plans which can focus on the well-being of the communities through group schemes.
Group schemes are provided to employers for their employees, to people below the poverty line, and to various associations and societies.
It assembles the resources for economic development:
Funds available with insurance companies play a greater part in the economic development. The government is able to fund projects that can enhance basic amenities pertaining to transport, housing, electricity, water supply and communication.
Insurers channelise the vast pool of savings contributed by organisations and individuals and employ it for productive purposes, which further ensure well-being.
So now that you understand the complete advantage that you get by taking insurance, stop avoiding it and choose the one which best suits your requirement and budget from the hundreds of policies and plans available in the market.
Naval Goel is CEO and Founder, PolicyX