Know the 4 Purposes and Main Functions of Insurance so You Can Enjoy the Benefits

What are the main purposes and functions of insurance? Is it true that insurance is just a waste of money or a service that only the upper middle class people have?

In principle, insurance is one way to mitigate risks that may occur in the future. This is so that you don’t have to spend big money if in the future a loss occurs, whether it involves life or property.

Currently, insurance products are also very diverse and are priced at premiums ranging from cheap to expensive. For more details, see the discussion of the following definitions, purposes, functions, and benefits of having insurance.

Definition of Insurance

According to Book 4 Insurance released by the Financial Services Authority (OJK), insurance comes from the English word, assurance, which means guarantee or protection.

Insurance can be defined as an agreement between two parties, namely the insurer (insurance company) and the insured (individual or business entity).

In other words, the company binds itself to provide compensation to individual policyholders, in the event of an accident that is guaranteed and agreed upon in the policy.

In the process, the policyholder pays a premium to the insurance company as a fee for transferring risk from the policyholder to the insurance company.

The elements of insurance, namely:

1. Risk diversion
2. Premium payments
3. The insurance company is obliged to pay compensation according to the terms and conditions stipulated by the policy.

According to Kamus Besar Bahasa Indonesia (KBBI), the word insurance or coverage can be defined as an agreement between two parties, the first party is to pay a fee (premium Meanwhile) and the second party is to provide security to the first party.

The content of this agreement is that in the event of an adverse event that falls the first party, the second party must provide a guarantee or compensation in accordance with the agreement made.

According to the Insurance Law no. 40 of 2014 t, insurance is an agreement between two parties, namely the insurance company and the policy holder. which forms the basis for receipt of premiums by insurance companies in exchange for:

1. Provide compensation to the insured or the policy holder due to the loss suffered, damage, costs incurred, loss of profit or legal liability to third parties that may be suffered by the policy holder due to the occurrence of an uncertain event

2. Providing payments with reference to the death of the policyholder or payments based on the life of the policyholder with benefits whose amount has been determined and or based on the results of fund management.

From the definitions above, it can be concluded that the definition of insurance is a mechanism for transferring risk from the insured to the insurer by paying a premium. If a loss occurs, the insurer will compensate the insured.

Insurance Purpose

After knowing the definition of insurance, then what is the purpose of insurance? As already mentioned, insurance provides protection to policyholders or customers from risks that may occur in the future. This protection is in the form of compensation.

It should be noted that insurance is not intended to make a profit, but to get compensation. For more details, here are the goals of insurance that you must know.

Insurance as a Transfer of Risk

The main purpose of insurance is the transfer of risk. The policyholder has insurance with the aim of transferring the risk that threatens his property or life.

By paying a premium to the insurance company (the insurer), since then the risk has shifted to the insurer. The risk can be related to his life and safety or it could be the risk of harm to his property.

If one day the danger really occurs until the policyholder suffers a loss such as disability, death, or damage to goods, of course the policyholder will find it hard to bear the burden of the risk. For this reason, by having insurance, the insurance company will reduce or eliminate the risk burden by paying a certain amount of money in accordance with the agreement stated in the policy.

In the process, the prospective customer and the insurance company first agree to provide insurance with the aim of diverting the risk that threatens the property or life of the prospective customer.

Then, the customer will pay a premium to the insurance company. From now on the risk is transferred or shared with the insurance company.

Insurance as Payment of Compensation

The next purpose of insurance is insurance as a form of payment of compensation to the insured, not seeking profit.

This compensation payment applies to all types of insurance including health insurance, life insurance , car insurance, motorcycle insurance, fire insurance, property insurance, and travel insurance.

If in the future there is a disaster that causes losses, the insurance company will pay compensation in the amount equal to the amount of insurance to the policyholder. In practice the losses that arise can be partial (partial loss) , or total loss (total loss).

Thus, the policyholder has insurance to obtain compensation payments that are actually suffered.

In the payment of compensation by the insurance company, the principle of subrogation is applied, namely the replacement of the insured’s rights by the insurer who pays the value of the insurance claim.

Insurance for Compensation Payments

Continuing the second point, the next purpose of Insurance is for the payment of compensation. Both general insurance and life insurance are held based on a voluntary agreement between the insurer and the insured.

Although the agreement is held voluntarily, when both parties have agreed to provide insurance, the legal basis or insurance law begins to apply. And, all insurance processes are carried out in accordance with the applicable insurance laws in Indonesia.

Insurance for compensation payments aims to protect customers from dangers that can result in death or disability. By paying a premium, the policyholder and his family will get protection.

This generally happens to life insurance owners where if the policyholder dies or suddenly cannot make a living for his family, the compensation money will be paid by the insurance company in accordance with the agreement stated in the policy.

This compensation money will be received by the family as heirs previously appointed by the policy holder. The amount of this compensation is stated in the insurance policy. For that, before signing the insurance policy, read it in detail, yes, so as not to feel disadvantaged.

Insurance aims for the welfare of members

Finally, insurance has a goal to improve the welfare of its members. Generally, this goal is in the type of insurance used in associations or often found in insurance that uses sharia principles.

In the association there are several people who function as insurers, while other members of the association are domiciled as the insured.

The way this insurance works is almost the same as a cooperative, where if there is an event that is detrimental or causes the death of a member of the association, the insurer in the association will pay a certain amount of compensation to the member concerned.

Insurance that uses sharia principles does not aim to make a profit, but to improve welfare, in accordance with the vision and mission it carries, namely aqidah, worship, iqtishodi, and the people.

Insurance Function

In addition to the purpose of insurance, there is also an insurance function. Understanding the function of insurance is very important so as not to have the wrong assumption.

Not only to mitigate risk, insurance also has an important function. For more details, the following are the protection functions offered by insurance companies.

Insurance provides certainty

Insurance provides certainty of payment due to uncertainty arising from an accident. This detrimental uncertainty can be minimized with better planning and administration.

Insurance provides protection

The main function of insurance is to protect customers from the possibility of an adverse event causing disability, damage, or even death.

Insurance guarantees payment of losses. Thus protecting the insured from suffering. Insurance can’t tell when

occurrence of the risk but can bear the loss for the occurrence of the risk.

Risk Sharing

Based on the probability of risk, the insured shares or submits the risk to the insurance company in the form of a premium.

Helping Economic Progress

Insurance can protect people from major losses in the form of damage, destruction, and death. Insurance also provides initiatives to work hard for the betterment of society.

Factors of economic progress such as property, valuable assets, people, machines, and society will not suffer much losses, so that the business can continue to run.

Insurance Benefits

After understanding the purpose and function of insurance, it can be seen that there are many benefits of having insurance. The following is a summary of insurance benefits.

Provides a Sense of Security and Protection

By having an insurance policy, the policyholder will avoid the possibility of risk of loss in the future and his soul will be calm because the object being insured is guaranteed by the insurance company.

Fairer Distribution of Costs and Benefits

The greater the risk of loss, the greater the insurance premium.

Provide certainty

Basically insurance seeks to reduce the uncertain consequences of an adverse situation, which cannot be predicted beforehand so that the costs or financial consequences of the loss are certain or relatively certain.

Savings Facility

For certain types of insurance, the money insured has a cash value that can be taken, such as in whole life or endowment insurance. There are also insurance products that are intentionally combined with investments, namely unit links.

Risk Diversion and Dissemination Instruments

Through insurance, the risk of loss may be transferred and spread to the insurer.
Helping to Improve the Business Activities of Police Officers

Policyholders can continue to invest in a business field without having to worry about risks that cause their business to stop.

Life is calmer

Because all the risks that can be insured already have to bear.

Credit guarantee

Insurance policies can be used as credit guarantees, usually only for life insurance and are very selective on certain types of credit and banks.

Understand the Purpose and Functions of Insurance to Get More Benefits

Well, by looking at the purpose and function of insurance, then you already know the benefits that you can get in the future.

So, how important is it to have insurance? The answer: very important. Because insurance as protection can be obtained in urgent and unexpected conditions, so there is a guarantee for your own life and that of your beloved family.

Immediately have the best protection, by buying car insurance products, motorcycle insurance, health insurance, life insurance, and travel insurance at Risdosagala. Risdosagala will also help you to choose the right insurance product with our compare features.

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