Beyond Premiums: Understand the True Role and Functions of Insurance

Most of us plan our next trip, the upcoming festival, or even our weekend dinner. But almost no one plans for a sudden illness, accident, or job loss. Insurance is one of the most important parts of life, but it’s something many of us ignore. It quietly and powerfully steps in just when you need it the most.

So, what does insurance really do, and why isn’t it considered a luxury anymore? And is financial security something every Indian truly needs?

Let us see!

What is Insurance?

Insurance is a contract where an individual pays a premium to an insurance company in exchange for financial protection against specific risks. These risks could include medical emergencies, property damage, loss of life, or even legal liabilities.

In simple terms, insurance helps you recover financially when something goes wrong.

For example, if you have health insurance and are hospitalised, the insurance company pays for your medical bills. 

If you have life insurance and something unfortunate happens, your family receives a lump sum to help them cope financially.

Functions of Insurance: How It Protects You and Your Finances

Insurance is more than just paying premiums and waiting for claims. It plays an important role in protecting you and your family from unexpected financial problems. 

Let’s understand the main functions of insurance in a way that’s easy to follow.

1. Risk Transfer

The biggest function of insurance is to transfer risk from you to the insurer. When you buy an insurance policy, you are basically sharing the financial burden of any unexpected event, like an accident, illness, or loss of property, with the insurance company. 

This means that instead of facing a large expense alone, the insurer helps cover it. This way, your savings and income stay safe.

2. Loss Reduction

Insurance companies do more than just pay money when something goes wrong. Many of them also provide services to help reduce the chance of loss. 

For example, health insurance plans may offer free health check-ups or wellness advice. Motor insurance companies may give tips on safe driving. These steps help reduce future risks and keep you protected.

3. Resource Mobilisation

When you pay your insurance premiums, the insurance company collects a large amount of money from many people. This money is then invested in the economy, like in businesses, infrastructure, and government projects. 

This helps the country grow and also ensures that the insurer has enough funds to pay claims when needed.

4. Encourages Saving

Some insurance products, like life insurance policies, also work as savings tools. Along with protection, these plans help you build money over time. 

So, insurance not only safeguards you from risks but also helps you save for important goals.

5. Provides Financial Stability

Finally, insurance creates a safety net during tough times. If you or your family face a crisis like illness, accident, or loss of income, insurance helps maintain financial stability.

Features of Insurance

Insurance offers financial protection. Here are some unique features of insurance:

1. Risk Coverage

You pay a premium, and in return, the insurer promises to cover losses related to these risks.

2. Premium Payment

To keep insurance active, you pay a fixed amount called a premium. This can be monthly, quarterly, or yearly depending on your policy.

3. Policy Period

Insurance coverage lasts for a specific time, called the policy period. After this time, you can renew the policy or let it end.

4. Claim Settlement

If a covered event happens, you file a claim with the insurer. After verification, the insurer pays the amount agreed upon in the policy.

5. Contractual Agreement

Insurance is a legal contract between you and the insurer. This contract clearly explains the terms, conditions, coverage, and exclusions.

Fundamentals of Insurance

Understanding these fundamentals will help you make better insurance decisions:

1. Insurable Interest

You must have a financial interest in what you are insuring. For example, you can insure your own life, your house, or your car because you would suffer financially if they were lost or damaged.

2. Utmost Good Faith

Both the insured and the insurer must be honest. You need to provide true and complete information when buying insurance. If you hide facts, the insurer can reject your claim.

3. Indemnity

Insurance is meant to restore your financial position, not to help you make a profit. If your insured car is damaged, insurance will cover the repair cost, but not more than the actual loss.

4. Contribution

If you have multiple insurance policies for the same risk, the insurers share the claim amount. You cannot claim full compensation from all insurers.

5. Subrogation

After paying your claim, the insurer can claim back the loss amount from a third party responsible for the damage. For example, if someone else caused your car accident, the insurer will try to recover the money from that person.

How Insurance Works in India

Insurance works in a simple way.

Step 1: First, you decide what kind of insurance you need—like health, life, motor, or home insurance. You select a policy based on how much coverage you want and the premium you can afford.

Step 2: Pay the Premium

To keep your insurance active, you pay a regular amount called a premium. In India, premiums can be paid monthly, quarterly, yearly, or as a lump sum, depending on the policy terms.

Step 3: Stay Covered for the Policy Period

Your insurance protects you during the policy period—usually one year or longer. You can renew the policy before it expires to keep the protection going.

Step 4: In Case of an Event, File a Claim

If an insured event happens—like a medical emergency, accident, or damage—you notify your insurance company and file a claim. This means you request the insurer to pay for your loss as per your policy.

Step 5: Claim Assessment and Approval

The insurer reviews your claim and checks if it meets the policy conditions. They may ask for documents like bills, police reports, or medical records. If everything is in order, they approve your claim.

Step 6: Claim Settlement

Once approved, the insurer pays you the claim amount. For health insurance, they might pay the hospital directly (cashless) or reimburse you after you pay the bills. For life insurance, the nominee receives a lump sum payment.

Step 7: Keep Your Policy Updated

Always renew your policy on time and update important details like the nominee’s name, address, or contact number. This ensures smooth claim processing when needed.

Special Features in India

• Regulation by IRDAI: The Insurance Regulatory and Development Authority of India (IRDAI) protects your rights and ensures insurance companies follow rules.
  
• Cashless Hospitals: Many health insurance plans offer cashless treatment in-network hospitals, so you don’t have to pay upfront.
  
• Tax Benefits: Insurance premiums for life and health insurance qualify for tax deductions under sections 80C and 80D of the Income Tax Act.

Role of Insurance in Financial Planning

Insurance plays a protective role in financial planning. While mutual funds and stocks help you grow wealth, insurance ensures that an emergency doesn’t wipe it all out.

Let’s consider two scenarios:

• Without Insurance: A medical emergency could cost ₹5 lakh. If you don’t have insurance, you may withdraw your mutual fund savings or even take a loan.
  
• With Insurance: A good health insurance plan will cover most or all of your costs, and your savings remain untouched.

In short, insurance protects your assets and provides stability during emergencies.

Insurance Essentials to Remember

• Always compare plans before buying. You must focus on coverage, claim settlement ratio, and exclusions.
• Buy early. Premiums are lower when you’re young and healthy.
• Keep documents updated, such as nominee details, contact info, and renewal dates.
• Read the fine print of your policy. This makes it easy to understand what’s not covered.

Final Thoughts

Insurance is not just about paperwork and premiums. It’s about financial survival during tough times. Whether it’s a health scare, an accident, or an untimely death, insurance ensures that your financial journey doesn’t stop.

It’s time to make insurance a core part of every Indian’s financial life.

Protect first. Then build wealth.

Functions of Insurance- FAQs