6 Importance of Insurance to a Business
Insurance is a form of risk management primarily used to hedge against the risk of potential financial loss.
Again insurance is defined as the equitable transfers of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care.
The insurance has been useful to the business society also.
Importance of insurance is a business are;
- The uncertainty of business losses is reduced.
- Business efficiency is increased with insurance.
- Keyman indemnification.
- Enhancement of credit.
- Business continuation.
- The welfare of employees.
Some of the uses are discussed below:
1. The uncertainty of Business Losses is Reduced
In the world of business, commerce, and industry a huge number of properties are employed.
With a slight slackness or negligence, the property may be turned into ashes. The accident may be fatal not only to the individual or property but to the third party also.
New construction and new establishment are possible only with the help of insurance, in absence of it, uncertainty will be to the maximum level and nobody would like to invest a huge amount in the business or industry.
A person may not be sure of his life and health and cannot continue the business up to a longer period to support his dependents.
By purchasing a policy, he can be sure of his earning because the insurer will pay a fed amount at the time of death.
Again, the owner of a business might foresee contingencies that would bring great loss. To meet such situations they might decide to set aside annually a reserve, but it could not be accumulated due to death.
However, by making an annual payment, to secure immediately, insure policy can be taken.
2. Business Efficiency is Increased with Insurance
When the owner of a business is free from the botheration of losses, he will certainly devote much time to the business. The carefree owner can work better for the maximization of the profit.
The new, as well as old businessmen, are guaranteed payment of a certain amount with the insurance policies at the death of the person; at the damage, destruction or disappearance of the property or goods.
The uncertainty of loss may affect the mind of the businessmen adversely. The insurance, removing the uncertainty, stimulates the businessmen to work hard.
3. Key Man Indemnification
The key man is that particular man whose capital, expertise, experience, energy, ability to control, goodwill and dutifulness make him the most valuable asset in the business and whose absence will reduce the income of the employer tremendously and up to that time when such employee is not substituted.
The death or disability of such valuable lives will, in many instances, prove a more serious loss than that by fire or any hazard.
The potential loss to be suffered and the compensation to the dependents of such an employee requires an adequate provision that is met by purchasing adequate life-policies.
The amount of loss may be up to the amount of reduced profit, expenses involved in the appointing of such persons and payment to the dependents of the key man. The Term Insurance Policy or Convertible Term Insurance Policy is more suitable in this case.
4. Enhancement of Credit
The business can obtain a loan by pledging the policy as collateral for the loan. The insured persons are getting more loans due to the certainty of payment at their deaths.
The amount of loan that can be obtained with such pledging of policy, with interest, thereon will not exceed the cash value of the policy.
In the case of death, this value can be utilized for setting the loan along with the interest.
If the borrower is unwilling to repay the interest, the lender can surrender the policy and get the amount of loan and interest thereon paid.
The redeemable debentures can be issued on the collateral of capital redemption policies. The insured properties are the best collateral and adequate loans are granted by the lenders.
5. Business Continuation
!n any business particularly partnership business may discontinue at the death of any partner although the surviving partners can restart the business, in both the cases the business and die partners will suffer economically.
The insurance policies provide adequate funds at the time of death. Each partner may be insured for the amount of his interest in the partnership and his dependents may get that amount at the death of the partner.
With the help of property insurance, the property of the business is protected against disasters and the chance of disclosure of the business due to the tremendous waste or loss.
6. Welfare of Employees
The welfare of employees is the responsibility of the employer. The former is working for the latter.
Therefore, the latter has to look after the welfare of the former which can be provided for early death, provision for disability and provision for old age.
These requirements are easily met by the life insurance, accident and sickness benefit, pensions which are generally provided by group insurance.
The premium for group insurance is generally paid for by the employer. This plan is the cheapest form of insurance for employers to fulfill their responsibilities.
The employees will devote their maximum capacities to complete their jobs when they are assured of the above benefits. The struggle and strife between employees and employers can be minimized easily with the help of such schemes.