Insurance- Functions, Benefits, and How it Works

What is Insurance

What do you understand by insurance?

Insurance is a legal agreement between an insurance firm (the insurer) and an individual (the insured). In this case, the insurance company guarantees to indemnify the insured for any loss caused due to the covered contingency. A contingency is an event that results in a loss. It may be the death of the policyholder or the property may be damaged or destroyed. 

This is known as a contingency because the outcome of the event is unclear. In return for the insurer's promise, the insured pays the premium. You pay premiums regularly (which can be set up as EMIs for automatic deduction from your bank account) to the insurer, and if something goes wrong, they pay you back as a sum assured We do. There are many types of insurance like health insurance, life insurance, vehicle insurance, etc. Let us understand the functions of insurance and its benefits.

What are the functions of insurance?

The purpose of insurance is to share the loss caused by a certain risk among several people exposed to it and agree to insure oneself against it. The most important role of insurance is to spread the risk among the group of people insured against it, share the loss of each member of the society on the basis of the probability of loss of their risk and protect the insured from loss.

Types of insurance

The functions of insurance are given as follows, divided into primary functions of insurance and secondary functions of insurance.

1. Primary Functions of Insurance

The primary functions of insurance are:

protection and security

The main function of insurance is to protect against the possibility of loss. The timing and amount of loss is unpredictable, and if there is a risk, the person will suffer a loss if there is no insurance. Insurance ensures that the loss will be paid and thus saves the insured from suffering. Insurance cannot prevent a risk from occurring, but it can cover the loss caused by the risk.

provide protection and security

Insurance provides financial support and mitigates the risks that come with business and living. It ensures safety and security in the event of a specific incident. The basic function of insurance is thus to protect against future perils, accidents, and vulnerabilities. No insurance can prevent existing risks or prevent future calamities, but it can undoubtedly help you by providing coverage for the misfortune of peril.

Collective risk

People buy insurance policies to protect themselves from tragedy. Regardless, not every one of them falls victim to misfortune on a regular basis. Few people contribute to insurance. Every member of the general public who receives security pays an annual premium to the reserve. Those who are victims of perils are compensated as per the terms of the insurance policy, which helps them to meet their financial demands during a challenging period.

risk assessment

Insurance companies assess the level of risk by looking at several factors that contribute to a chance. The process of determination of premium rates is also based on the risks of the policy.

certainty of payment

Insurance gives payment certainty in the event of a loss. Better planning and administration can help reduce the risk of loss. In risk, there are different types of uncertainties. What will be the danger, when will it happen and how much will the damage be? In other words, both the occurrence of time and the amount of loss are unpredictable. All these concerns are addressed through insurance, and the insured is guaranteed money in case of loss.

2. Secondary Functions of Insurance

Insurance has many secondary functions. These are as follows:

financial help

When you have insurance, you are guaranteed money to pay for the treatment as you get proper financial support. It is one of the major secondary functions of insurance through which the general public is protected from diseases or accidents. Individuals look for insurance with lower premiums as it is more affordable. Thus, one of the main outcomes of insurance is financial support to health organizations, fire departments, educational institutions and other organizations that help prevent mass loss due to death or destruction.

source of capital

Insurance is a source of capital for the society. The accumulated cash is diverted into the productive channel. With the help of insurance investment, the death of the capital of the society is reduced to a great extent. The insurance industry, businesses, and individuals all benefit from the investments and loans of insurers.

efficiency in productivity

The function of insurance is to relieve the stress and suffering associated with the death and destruction of property. A person can dedicate his body and soul for better achievement in life.

contribute to economic progress

Insurance provides an incentive for people to work hard for betterment by protecting the society against the colossal loss of loss, destruction and death. People also provide large amounts of capital, which is the next factor in economic growth. Property, valuable property, people, machines and society are unlikely to suffer significant damage due to a disaster.

investment and money-saving tool

When you buy an insurance policy, the insurance provider encourages you to set up an insurance system. It simplifies the process of understanding how insurance works and the process of paying premiums.

source of foreign exchange

Insurance known as Overseas Medical Insurance Scheme (OMIS) can be purchased for Indians traveling abroad for business and other purposes. It can be bought in Indian currency. On the other hand, Overseas Mediclaim Insurance Scheme [OMIS(E&S)] for employment and studies can be bought in foreign currency. Hence, it serves as a source of foreign exchange where persons traveling outside the country can also access insurance.


Insurance policies usually contain a proposition clause which is defined as the right by insurance carriers to legally pursue a third party who is responsible for the injury of the insured. Through this process, the sum assured to be claimed can be recovered by the insurance carrier to cover the loss caused to the insured.

What are the benefits of insurance?

Insurance has many roles and importance. Some of these are given below:

1. The sum insured is invested in a number of initiatives such as water supply, energy and highways, which contribute to the overall economic prosperity of the country.

2. Rather than focusing on a single individual or organization, the threat affects different people and organizations.

3. Insurance protects you and your family from various risks that might otherwise put you or your family in financial trouble.

4. It encourages risk control action as it is based on risk transfer mechanism.

5. Insurance policies can be used as collateral for loans. When it comes to home loans, having insurance coverage makes it easy to get a loan from the lender.

Insurance - Tax Benefits

What are the insurance benefits as per the Income Tax Act?

Paying taxes is one of the major responsibilities of all citizens. By making proper investments, you can always reduce your tax burden. The Income Tax Act of 1961 provides specific exemptions on eligible investments for all taxpayers. Tax-advantaged mutual funds, fixed deposits, pension plans, public provident fund (PPF) schemes and life insurance policies are examples of these investments.

In addition, the tax department gives special exemptions for various insurance plans, such as life and health insurance policies. Irrespective of the type of insurance you choose, all insurance plans serve three important purposes as an investment. They provide tax benefits, financial protection against unforeseen events and help in building your portfolio.

Types of Tax-Deductible Insurance

In today's world, insurance coverage is a must. And, to boost their value and adaptability, the government provides tax benefits for these insurance plans:

1. Health Insurance Policy

2. Life Insurance Policy

The details for the same are given below:

Functions of health insurance policy

A health insurance plan is an essential part of your overall insurance strategy. With rising medical costs and risk factors, the function of insurance in health coverage has become more of a necessity than an option. Health insurance products provide financial protection for you and your family in case of a medical emergency. These insurances only provide comprehensive health coverage and do not protect you from any other risks. However, under the Income Tax Act of 1961, even these schemes are eligible for tax exemption.

The tax benefits are given in the table below:

section number

Insured Person

deduction amount

Section 80D

Individuals and their families (under 60 years of age)

Up to Rs 25,000 

Section 80D

Individuals and their family plus parents (under 60 years of age)

Total Rs. 50,000 (25,000+ 25,000)

Section 80D

Individuals and their family plus parents (age above 60 years)

Total Rs. 75,000 (25,000 +50,000)

Section 80D

Individuals and their family (any person above 60 years of age) as well as parents (age above 60 years)

Total Rs. 100,000 (50,000+ 50,000)

Section 80U

Persons with Disabilities

Up to Rs 75,000 

Section 80DD

Any dependent family member with disability

If the disability is severe, Rs. 1,25,000

Section 80DDB

Individual or dependent family member (under 60 years of age) with a specific illness

Up to Rs 75,000 

Section 80DDB

Individual or dependent family member (over 60 years of age) with a specific illness

If the disability is severe, Rs. 1,25,000

Specific diseases include cancer, AIDS, chronic kidney failure, neurological issues, blood disorders, etc. 5000 inclusive of deduction for preventive medical health check-ups within the limits given above.

Functions of life insurance policy

Life insurance policies are the most common type of insurance that people buy to provide financial protection for themselves and their families in case of a force majeure event in the future. In this policy, the insurance company agrees to pay a specified amount (also known as Sum Assured) to your nominee if you die during the term of the plan. Some insurance plans, such as endowment, refund, and whole life insurance policies, offer maturity value benefits if you survive to the end of the policy term. The tax benefits of a life insurance policy are given in the table below:

section number


Section 10(10D)

The amount received by you from the insurance company is excluded from income tax subject to certain limits under this provision. Total Sum Assured, Bonus, Maturity Value, Surrender Value and Death Benefit are all excluded from tax.

Section 80C

All types of life insurance policies are available for tax exemption under the Income Tax Act. Benefits are available on life insurance policies, whole life insurance plans, endowment plans, refund policies, term insurance and unit linked insurance plans. The maximum deduction available is Rs. 1,50,000.

Section 80CCC

This provision exempts any amount put into an annuity plan of the Life Insurance Corporation of India or other insurance company to receive a pension. This provision is maximum 1.5 lakh


Every person must take insurance for his well-being. You can choose from different types of insurance as per your requirement. It is recommended to take a health or life insurance policy, as they prove to be beneficial in tough times. We hope that the article has provided insight into what is insurance, the benefits of insurance, the functions of insurance, the primary functions of insurance and secondary functions of insurance, and tax benefits related to insurance.

frequently Asked question

Question: What is the maximum deduction available under section 80C of the Income Tax Act?


The maximum deduction available under section 80C of the Income Tax Act is Rs. 1,50,000.

Question: What are the two types of insurance for which tax benefits are available under the Income Tax Act?


Life insurance policies and health insurance policies are two types of insurance for which tax benefits are available under the Income Tax Act.

Q: What are some benefits of insurance?


Two benefits of insurance are given below. For the rest, see the benefits article above.

Insurance protects you and your family from various risks that might otherwise put you or your family in financial trouble.

Insurance policies can be used as collateral for loans. When it comes to home loans, having insurance coverage makes it easy to get a loan from the lender.

Question: What are the two types of functions of insurance?


The functions of insurance are divided into two types, namely primary functions of insurance and secondary functions of insurance. The details about both types are given above.

Question: What is insurance?


Insurance firms (insurers) and individuals enter into a legal agreement known as insurance (insured). In this case, the insurance company guarantees to indemnify the insured for any loss caused due to the covered contingency.


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