What is the significance of insurance?

Answer 1

Insurance is nothing but an agreement between the insurer (The Insurance Company) and the insured (You) to pay an amount as compensation if any unexpected event occurs. This amount may vary from a few hundred to even a few crores. The maximum amount the insured person can claim depends on the amount agreed upon as per the insurance policy. Why do Insurance companies provide Insurance Policies? Insurance is provided only for events that have a small chance of happening. The company would never insure you for something that is bound to happen. Say for example you cannot insure your car if you are going to use it for Racing. Because, the chances of your car getting damaged during a race is far higher than when you drive it on ordinary roads. Let me explain Insurance with an example. Person X contacts an insurer say LIC (Life Insurance Corporation of India) and take an insurance policy worth Rs. 10,00,000/- health insurance with critical illness cover for a period of 10 years. For Taking the policy, LIC asks X to undergo a medical test and once the test clears X will start paying a premium of say Rs. 15,000/- per annum. The moment X pays his first premium, the policy is in force and if he gets any health complications then he can claim the insurance. Assuming after 6 months X meets with an accident and needs to undergo a surgery. The Doctors estimate the cost of surgery at Rs. 2,50,000/- Now X would provide sufficient proof to LIC that he met with an accident and along with the doctors bills, he would submit all documents to LIC. Once LIC validates the documents it would release a payment of Rs. 2,50,000/- to X. Though the policy is worth Rs. 10,00,000/- LIC is liable to pay X only the amount required for the treatment. Even if the amount is as small as Rs. 100/- LIC is liable to pay X the money. However, if the treatment expenses is say Rs. 11,00,000/- then LIC would pay X only Rs. 10,00,000/- The remaining Rs. 1,00,000/- needs to be met out by X out of his pocket. This is the concept of Insurance. Insurance is nothing but an obligation for the Insurer to compensate for any unexpected events that may happen to the insured person. Why do we need Insurance? There may be scenario's where the loss that we would incur due to some event would be extensive and we would not be in a position to incur the losses. Say for e.g., the only earning member in the family meets with an accident and is incapacitated from going to work for 6 months, what would the family do for their survival? These are the cases where Insurance comes in handy. The insured person can claim an amount corresponding to his disability losses and use the money to sustain his family until he is fit to resume his job.