Advantages and disadvantages of insurance

The insurance sector has experienced immense growth in the past few years. More and more people are realizing the importance of insurance, and taking up policies as per their needs.

But insurance like any other thing along with having numerous advantages has certain disadvantages too. In this article, we will discuss the advantages and disadvantages of insurance. Let’s first look at the advantages of insurance-

Advantages of Insurance

1. Financial protection

The prime function of Insurance is to provide you with financial protection in case of unexpected losses. Your insurance provider charges you with a nominal amount called the premium in exchange for providing this protection. In the case of life insurance, the beneficiaries receive the assured sum on the demise of the policyholder.

Several other insurance policies provide protection against miss-happenings like theft, fire, or natural calamities, etc. The funds received from the insurer help to continue the normal pace of life after the unfortunate events.

2. Risk sharing

We are exposed to various kinds of risks and uncertainties every day. These risks and uncertainties can cause major losses. Insurance acts as a cooperative device that shares your risks providing you with financial coverage for the same.

3. Encourages savings

In the case of life insurance, the premium paid to the insurer can also be considered as a saving, which will help the insured’s family in the future. Regular payment of insurance payment helps you to add discipline to your finances. Also, while you save money for premiums, your unnecessary expenses reduce automatically.

4. Self-sufficient

Damages to assets can lead to a huge financial loss for one, but with insurance, you won’t have to ask for financial support from anyone else. The claims will help you to manage the finances and bring back your financial stability. In case of deaths, the insurance amount can help the individual’s family to be self-sufficient.

5. Loan facility

Various insurance policies provide this facility or availing loans against the insurance policy. This loan can be obtained from your insurance company or any other financial institution. This provision can help you when you need money in an emergency.

6. Employment opportunities

Insurance has become a new age business while engaging hundreds of insurers and thousands of employees. The development of the insurance and finance sector has created many opportunities for those who have the qualification and caliber to excel in this industry.

7. Encourages foreign trade

Insurance is a device that reduces or eliminates the risk of financial losses in case of mishaps. This helps exporters and industrialists focus on the development of their business, allowing them to undertake risks and promote foreign trade.

8. Reduces inflation

An increase in prices of commodities is referred to as inflation. Reduction in the volume of money is necessary to control inflation. Money that you pay as a premium to the insurer helps reduce the market volume of money. Hence this helps control inflation in the country.

9. Develops our economy

A major part of the premium that is collected by the insurance companies is invested in sectors such as trade and industry. Such investments promote the growth of the economy as a whole.

Disadvantages of Insurance

Here are some of the disadvantages of insurance:

1. Not all losses are compensated

The insurance may not compensate for all types of losses that occur to the insured. In such cases, the insured might have to pay for the excluded losses from his own pocket.

2. Lengthy formalities

The insurance claims usually have lengthy legal formalities. This might lead to a delay in receiving the financial compensation.

3. Insurance is a business

At the end of the day, insurance companies are running a business. The companies may try to compensate as little as possible to the insured. There’s a possibility that the insurance companies may try to maximize their profits rather than the compensation amount for you.

4. Possibility of a crime

The benefits provided by insurance might tempt someone to commit crimes. This might sound disturbing, but there have been cases where frauds and scams were conducted to get the insurance claim.

5. Less ROI

Insurance policies do not offer much ROI as compared to other financial tools like shares and mutual funds.

Every financial decision you take has its set of pros and cons, even insurance. Choose wisely before opting for an insurance policy by considering your need, purpose and the advantages and disadvantages of insurance. You can immensely benefit from an insurance policy provided that you clearly understand its terms and conditions.