Explain the purpose and need of life insurance.

Life insurance is a policy that provides the basis of protection and financial stability after one’s death in a family. Its function is to support the other family members with financial stability. So, it is important to understand the purpose, functions and advantages of life insurance.

The primary objectives of life insurance are: 

Protection - The main objective of life insurance is to give protection. If a member in a family, particularly, the care taker of the family dies, the family faces many problems. Life insurance decreases the financial loss arising due to the death. After the death of insured member, the family is helped with the sum assured. People insure themselves with life insurance to make sure that their families do not face any difficulties upon their death. 

Investment - Life insurance not only protects a person from future risk, but also is a good mean of savings for the people. The ‘insured’ person invests small amounts, in the form of premiums, with an insurance company. If the insured person dies before the maturity date of policy, then the nominees of deceased gets more amount than invested. It helps the family to maintain the same standard of living.

Purpose of life insurance

The purpose of life insurance is to provide financial protection against the losses that may be incurred due to uncertain difficulties caused by ill-health, death of an earning family member or financial losses. A life insurance policy on a non-working spouse is considered as an essential part of a family life insurance plan since it would deliver income for a living parent with children at home. The events that cause losses may or may not occur during the running time of the contract of insurance. Insurance gives a kind of peace of mind to the ‘insured’. For example, Mr. X takes a life insurance policy, maturity period being 10 years. Annual premium for this policy is Rs.2000/-, while sum assured is Rs.25, 000/-. After paying premium for 4 years, the insured person dies. After his death, the total amount payable to his nominee would be Rs.25,000 + bonus, while he had paid only Rs.8000/- till his death as premium. On the other hand, if Mr. X lives for 10 years, then total amount payable to him, from that insurance company will be Rs.25,000 + bonus(which will be around 70% of the sum assured). In this manner, total amount received by insured will be Rs.42,500/- approximately, while he has paid premium Rs.20,000 only.
 

Families need life insurance to: 

1. Provide financial security to their family members at the times of financial crisis. 
2. Protect the home mortgage. 
3. Plan their future financial requirements. 
4. Avail the benefit of retirement savings and other investments.

Advantages of life insurance
Life insurance provides major benefits to the society. The following are the advantages of life insurance: 

Reduces Worries - Life insurance reduces stress due to the financial security it offers. 

Investment opportunity - Life insurance contracts provide double benefits of both protection and investment, as the event assured against is sure to happen. In fact, a life insurance investment offers attractive returns. 

Credit enhancement - Businessmen would enjoy a better credit standing as they transfer the risks to the insurance company. 

Employment opportunity - Insurance companies are playing a very important role in challenging the problem of unemployment in the country by offering employment opportunities for many people. Moreover, there are large numbers of people working as insurance agents, professionals, etc. 

Tax Benefits - The premiums paid for certain life insurance are eligible for tax rebate under section 80C of the income tax act. 

Encourages thrift - As the premium paid is a form of compulsory savings, it promotes thrift and builds savings.

Functions of life insurance
In business, family and personal life, life insurance has important functions. In business, it plays a major role in calculated planning for future actions. Families purchase life insurance mainly as a security against future loss. 

Protection to stockholder - Companies with stockholders have life insurance contracts in place so any unpredicted transition goes easily. Both large and small companies insure the life of important employees, whose loss would distress business operations. 

Small business actions - People having sole ownership businesses need life insurance to enable the business operations to continue even after their death, at least until there is time to arrange for forthcoming management. In a partnership, life insurance with an assigned beneficiary contract will give a chance to the business to sustain and weather the challenges of the business. 

Retirement complement - Some life insurance policies can be converted into an annuity that will pay bonuses to the policyholder after retirement. These are more expensive policies. 

Support to the family - Life insurance provides security to a family’s needy survivors with a financial help in their grief. 

Final expenditures - Many persons carry enough life insurance to cover funeral costs and other end-of-life expenses of the insured, and to repay unsettled dues. 

Gifts and special endowments - Another function of life insurance is to enable special endowments such as a major gift to a charity. A special facility in life insurance can be directed to fund education for a child. Parents of a child with an ill health may want to set apart a portion of their life insurance in a special fund to care for the child.