Life insurance provides security

Why do we need insurance? Because, life is full of uncertainties, unexpected events can cause loss to life or property, and we need to be compensated for such losses. We do this all the time, really. Don’t you carry a spare pen when you have to write an examination, a spare tyre when you go on a long road trip? Don’t we invest in a lock, however costly, to protect our possessions from possible theft? Through insurance we minimize the risk in the event of a loss, as in each of the above cases.

A spare pen will see you through the exam even if one breaks; a spare tyre will help you continue the journey in case one gets punctured; a life insurance policy similarly compensates the economic loss a family could suffer on the death of the breadwinner. The economic value of what one would have lost is the ‘sum insured’. What one is prepared to pay to get such a ‘security cover’ is the premium. The mental peace the security gives makes insurance worthwhile.

Insurance is security. Insurance is compensation. This means that one cannot make a profit through insurance. Insurance shall just compensate a loss. No one shall become richer by another’s death or one’s own loss.

In life insurance there cannot be full economic compensation when a person dies. What it attempts is providing a compensation that can bring in a flow of income if the compensation is invested. However the quantum of  this compensation is limited by the amount of premium paid and the probable financial loss the family may suffer on death of the insured person.

Key words:

Risk
Loss
Security
Compensation