Insurance is the offer of a guarantee, represented via a contract and governed by its policy, wherein the individual or the entity being insured is entitled for a compensation against losses agreed upon in the given policy contract.

As a simple example, let’s consider the case of Raj. He buys a term life insurance for himself for INR 50 lakhs value. He paus a premium of INR 6000 per year for the same. As long as Raj continues to pay the premium each term, the insurance policy guarantees (subject to terms and conditions outlined in the policy document) that in the unfortunate event of Raj’s demise during a particular term when the policy is active, Raj’s nominee shall be paid the sum equivalent to the insured value, i.e., INR 50 lakhs. That is Raj’s life insurance policy.

In another example, we can take the case of Raj’s insurance policy on his car. As long as Raj continues to pay, in any active term (premium paid in advance), should his car undergo any damage (as per agreed upon terms and conditions in the policy document), the insurance company will pay for the repairs in accordance with the amount of the policy as well.

Ever wondered how can an insurance company pay large sums to you as the insured while you pay just a small amount each term? It’s not difficult to understand but surely is a complex undertaking.

Spreads risk, to community. Insurance companies make money because the evaluate the risk and decide that it’s worth the gamble.

Simply put, it’s the distribution of risk to a large set of people and entities, and a scientific understanding of the probability of payouts. In case of Raj mentioned above, he is 35 years old and healthy. His probability of an unfortunate demise is miniscule. And as actuarial calculations and past history show, most people do not die at all in the insurance term, or die very late into their lives. This ensures that the insurance company collects more money than it has to disburse in most situations. It also ensures they are able to keep their end of the bargain even in cases where their risk-calculations go wrong.

On top of that, the money pooled by the insurance company is not kept lying in their bank accounts. They are put into lucrative investments and managed by financial experts. In a good economy, this money is set to grow over significant periods of time, thus allowing the company to honour claims, as well as stay financially healthy.

Life is fickle. We do not know what is in store tomorrow for us.

Much rides on each of us, particularly those who have a clear economic value in the family. The breadwinners’ demise can be huge shock. Of course there is no remedy to the personal sense of loss that ensues. However the economic shocks can and must be minimized to the largest extent possible. Not all of us are endowed with large estates and properties that could take care of our families after us. So insurance is the best way to make life as comfortable for our family as possible after we are gone. And this economic loss is not a consideration only for people engaged in the conventionally understood economic activities, it applies to even to housewives, for there is an unrealized and unpaid economic value to what they do day-in and day-out. It’s for children too, for there is always a probable future economic value attached to them. We can never be too confident. But we can be responsible

But it’s not just life insurance that’s so important. Your health is equally important. As we progress in the 21st century, cost of healthcare is rising really fast. If not insured, sudden hospitalization can take a heavy toll on our finances and render us helpless in many cases. A health insurance policy for ourselves, parents, children et al can go a long way in bringing about a peace of mind and confidence that we can tide over any challenge thrown by life at us.

This sense of confidence that insurance brings extends to our possessions like house, car, appliances etc. too. All these possessions have a disproportionate value attached to them. A loss arising out of any situation can take its heavy toll if not tempered by insurance.

So in summary, Insurance lends us a sense of confidence in our existence and lets us strive for excellence and progress without worrying unduly about unfortunate events that life presents from time to time.