What is Insurance?

The business of insurance relates to safeguarding the economic values of assets. Every asset has a time period. After which, it might not be beneficial. Also a mishap or some other calamity may damage it or make it unusable. Insurance is a tool that helps to reduce the effect of such unfavorable situations. Source-IRDA

What is the purpose and need for Insurance?

Insurance is required for assets to prevent damages thorough unpredictable and accidental events. In the occurrence of perils, like fire, floods, breakdowns, lightning or earthquakes damage occurs to assets. If such perils occur, assets are exposed to damage and risk. The risk to a owner of an asset, because of peril, may be a few lakhs or a few crores of rupees, depending on the cost of the asset and it's contents. The peril cannot be avoided through insurance. The impact of the risk on the owner of the asset and people depending on it, is reduced by insurance. It partly compensates the losses. Insurance only applies to financial losses. Source-IRDA

Advantages of Life Insurance:

It is incorrect to say that life insurance is investment or means of saving. The saving and investment options are deposits in the bank, in national savings certificates, in mutual funds and all other saving instruments. In life insurance the fund available is not the total of the saving already made (premiums paid), but the amount one wishes to have at the end of the saving period (which is the next 20 or 30 years) and the final fund secured from the very beginning. Hence life insurance cannot be substituted as there are no other schemes that have this benefit.

Life insurance has several advantages in comparison to other forms of savings. Settlement is easy in case of death. Facility of nomination and assignment makes the collection of money by the heirs quicker. Creditors cannot claim life insurance moneys. There are benefits in income tax and capital gains. A life insurance policy is property and can be transferred or mortgaged and loans can be raised against the policy. Source-IRDA