Insurance benefits individuals, organizations and society in more ways than the average person realizes. Some of the benefits of insurance are obvious while others are not.
The obvious and most important benefit of insurance is the payment of losses. An insurance policy is a contract used to indemnify individuals and organizations for covered losses.
The second benefit of insurance is managing cash flow uncertainty. Insurance provides payment for covered losses when they occur. Therefore, the uncertainty of paying for losses out-of-pocket is reduced significantly.
A third and uncommon benefit of insurance is complying with legal requirements. Insurance meets statutory and contractual requirements as well as provides evidence of financial resources.
Another very important benefit of insurance is promoting risk control activity. Insurance policies provide incentives to implement a loss control program because of policy requirements and premium savings incentives.
The fifth benefit of insurance is the efficient use of an insured’s resources. Insurance makes it unnecessary to set aside a large amount of money to pay for the financial consequences of the risk exposures that can be insured. This allows that money to be used more efficiently.
Another uncommon, important benefit of insurance is support for the insured’s credit. Insurance facilitates loans to individuals and organizations by guaranteeing that the lender will be paid if the collateral for the loan is destroyed or damaged by an insured event. This reduces the lender’s uncertainty of default by the party borrowing funds.
The seventh benefit of insurance is it provides a source of investment funds. Insurance companies collect premiums up front, invest those premiums in a variety of investment vehicles, and pay claims if they occur.
The last benefit of insurance is reducing social burden. Insurance helps reduce the burden of uncompensated accident victims and the uncertainty of society.
Understanding these benefits is critical when analyzing the need for insurance and helps insureds justify the purchase of insurance.