The main aim of financial planning is to create financial assets that will help you realized future goals. However, various unwanted events can result in the loss of such assets. Therefore it becomes extremely important to safeguard your assets against the possibility of such loasses. Insurance in its purest sense is a hedge against various kinds of risks faced by us. Such as death illness, disability, or damage to property. The rationale that governs the purchase of insurance policies is that in the event of loss, the insured or the dependents can be monetarily compensated to the extent of the cover taken
Identify the risk:- whenever a insurance advisor approaches to any client for insurance a common reply which every advisor must face is we have insurance and we do not need it. Some of the Possible events are listed below
Death :-One question to ask is how many years my family will survive if something happened to me. Or in other words just divide your Sum Assured from your Annual House hold exp the answer will be in front of you in year that how many years you have insure your family’s bread and butter in case of any contangency
Disability:- One think which is worst then the death is disability, just ask a question what happened if the bread earner will not able to earn and due to medical expnses the household exp will shut up like any think
Need for Medical Care:- Just think of the situation than when one is very near to reach to his/her one of the important financial goal and due to illness or accident all the funds spend to one of the family member medical bills. Do you have any mediclaim policy
Have you insured you house?
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Meaning of Insurance
Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company.
A pool is created through contributions made by persons seeking to protect themselves from common risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool.
Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type.
Definition
Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.
The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'.
Concept of Insurance / How Insurance Works
The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.
All assets have some economic value attached to them. No person can deny that there is also a possibility that these assets may get damaged/destroyed or become non-operational due to risks like breakdowns, fire, floods, earthquake etc. Different assets are exposed to different types of risks like a car has a risk of theft or meeting an accident, a house is exposed to risk of catching fire, a human is exposed to risk of death/accident. Insurance is needed because of following reasons:
Social Security Tool
Insurance acts as an important tool providing a sense of security to the society on a whole. It is the right of every human-being to have basic amenities like food, clothing, housing, medical care, standard of living necessary for his personal and family's well being, and right to security in case of unemployment, disability, sickness or any other circumstances out of his control.
In case the bread earner of a family dies, the family suffers from direct financial loss as family's income ceases. As a result, family's economic condition gets affected unless there are other arrangements to rescue the family from this situation. Life insurance is one alternate arrangement that offers some respite to the family from financial distress. Otherwise this family would have been pushed into the lower strata of the society, which would be an additional cost to the society. This is because subsidies would have to be given to the family so as to enable it to survive and enjoy the basic rights at par with other people. Moreover, a poor family is generally seen to have a large family size with family members being illiterate. This on a whole affects the society and is a cost to the society. Therefore, insurance compliments the state in social management efforts.
Uncertainty
The basic need of insurance arises as risks are uncertain and unpredictable in nature. Getting insurance for an asset does not mean that the asset is protected against risks or its exposure to risk is reduced, but it actually implies that in case the asset suffers any loss in value due to such risk, the insurance company bears the loss and compensates the insured by making payment to him.
Economic Development
The premium paid by people to the insurance companies is a part of their savings. Insurance, thus, acts as a useful instrument in promoting savings and investments, particularly within the lower-income and middle-income families. These savings are ultimately used as investments fuelling economic growth.
General Purposes of Insurance
Insurance is widely popular and beneficial because of its following general purposes: