The Importance of Insurance as a Form of Investment - Term Paper Example

Running head: Insurance Insurance Insert Insert Grade Insert 28 October Insurance has been in existence for a long period; however, today, it has become more prevalent, as the insurable items keep on expanding. This paper discusses critically the concept of insurance, including its benefits and various types of insurance that exist. It emphasizes on the importance of insurance not only as a cushion in times of uncertainties, but also as a form of investment. Insurance Introduction Insurance is a practice that involves a company guaranteeing compensation for a specific loss such as, illness, damage, or even death; in return, the client is supposed to make certain payments. Economics defines insurance as a form of risk management, which is an equitable transfer of a loss from an entity to another and money is the form of exchange (Birds 54). An insurer is the company selling the insurance; the insured is the buyer of the insurance policy, whilst premium is the amount charged for a certain insurance coverage. An insured entity is protected from risks that may occur; however, the insured risk must meet the requirements for it to qualify as an insurable risk. Nevertheless, the insurance industry is flooded with many companies issuing different types of insurance at competitive rates. Types of insurance The insurance companies offer different types of insurance, for instance, auto insurance, health insurance, accident insurance, life insurance, and home insurance among others. The concept of risk is very important to insurance, as it is concerned with uncertainties. An insurance cover is usually designed to protect a customer against losses. Generally, clients choose certain covers that guarantee them a peace of mind and financial protection. For instance, life insurance is designed to assist loved ones incase of death of the insured; it is in form of payment to the beneficiaries – however, cases of suicide are not considered, (Holland, et al 65). The policyholder does not benefit from this type of cover, since it is active when he dies, hence benefiting his next of kin. Some critical illnesses are added to life insurance, and in this case, the policyholder will be paid a lump of money referred to as annuity and they are allowed to keep the money incase they recover. Car insurance is another common type of insurance since each driver is required to attain car insurance globally. Some types of Car insurance cover the third party incase of an accident and offer legal protection, but this depends on the kind of policy the insured has. Coverage may include the damage of the car, theft of the car, medical expenses and funeral expenses incase of death. However, policyholders are not required to buy all these covers. Home insurance protects the policyholder against financial losses and home damage, for instance, theft, and loss or damage of ones home. On the other hand, building cover protects the house against any damage, for instance, fire damage; however, the policy can exclude cases of floods and earthquakes, unless additional coverage is made. Moreover, personal accident insurance covers the death of a policyholder or permanent disability, which occurs when either driving or riding. Health insurance policies in most countries cover medical expenses, whilst dental insurance protects the policyholder from dental costs. In most cases, employers offer health insurance and dental insurance. Finally, property insurance protects the insured against risks of fire, climate like the tornados, and theft. However, for the cases of floods and earthquake, most insurance companies can only cover such risks if they are insured against. Benefits of insurance Insurance becomes part of our lives at some point; therefore, it is important for policyholders to understand that a policy that has a cheaper premium is limited in benefits. Outreville (135) emphasizes on the benefit of purchasing insurance, and sees it as a reduction of risk through the creation of pre-loss control, whereby, insurance is limited to pure risks. Insurance assists in protecting customers when uncertainties occur; protection can be offered against damages, liabilities, and financial losses. Some types of insurance are mandatory, for instance, car insurance. The main importance of this kind of insurance is that it protects the policyholder from paying damages in case of an accident that was his fault. Logically, many vehicle owners cannot afford to buy another car once theirs is severely damaged; thereby proving how important an insurance is in times of uncertainties. According to Rosenbloom (53), insurance companies do not pay for a loss that has been intentionally caused by the insured, such as, torching ones own car or attempting suicide. Generally, life losses cannot be avoided, for instance, one may fall ill at any time or his property may be damaged any time. Hence, insurance is vital in the cases of such uncertainties, such that, if an incident occurs, it does not affect the policyholder’s well being. Insurance is beneficial not only to the policyholder, but also to his beneficiaries; for instance, life insurance pays a large sum of money to the beneficiaries incase the policyholder dies. Life has always been full of uncertainties, and some occur when unprepared, hence leading to a lot of stress; indeed, health expenses are rising hence insurance caters for medical costs. According to Pushparaj (Para. 6), insurance companies are important in providing security. The insurance company fully compensates the policyholders, hence security is guaranteed to the insured. Moreover, insurance spreads risks among a large group of people such that it provides insurance policies to a large group of people; hence, the loss is spread among several policyholders. Insurance is also viewed as a form of investment, for instance, life insurance provides a form of investment, such that insurance develops a money saving habit in form of paying premium. The insured individual receives a large sum of cash once the policy has maturated; hence, insurance resembles an investment. Nevertheless, each type of insurance has its own costs, for instance, a term life insurance is much cheaper that whole life insurance, therefore creating an opportunity of the clients to choose their insurance cover depending on their affordability. In addition, flexibility is evident while choosing life insurance, which can vary in the number of years one intends to invest, according to ones capability. In addition, individuals are confident in purchasing expensive items such as cars without fear of loss or damage, since insurance exists. With such purchases, the economy is able to move forward. Therefore, insurance is becoming more prevalent as years pass, since people are finding it a necessity especially after purchasing expensive items. Conclusion Individuals do not realize the need for an insurance cover until they are involved in an accident or they are faced by damage. Nevertheless, insurance has become a vital tool in the society, and despite claims that insurance companies benefit form the high rates, policyholders attest to the importance of insurance. In case of damages, accidents and losses, insurance acts as a rescuer of the situation without the policyholder having to use his/her money. Therefore, insurance should be encouraged to all individuals, to provide and guarantee assurance in times of loss. Woks Cited Birds, John. Insurance Law in the United Kingdom. London: Kluwer Law International Publisher, 2010. Holland, David et al. Taxing insurance companies. Paris: OECD Publishing, 2001. Outreville, Jean. Theory and practice of insurance. NY: Springer Publisher, 1998. Pushparaj, A. Business Studies. Meaning & advantages of insurance & assurance. 2011. 29 October 2011. http://www.publishyourarticles.org/knowledge-hub/business-studies/meaning-a-advantages-of-insurance-a-assurance.html Rosenbloom, Jerry. The handbook of employee benefits: design, funding, and administration. NY: McGraw-Hill Professional Publisher, 2005. Read More