In lieu of an insurance cover, the insured pays premium to the insurer. The premium is received regularly in installments. Large funds are collected by way of premium. These funds can be gainfully employed in industrial development of a country. Life insurance policies are purchased by persons from all walks of life. It helps in collecting savings from a large number of persons
Spreading of Risk:
The basic principle of insurance is to spread risk among a large number of people. A large number of persons get insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of funds of the insurer. The loss is spread among a large number of policy-holders.
Insurance covers the loss of an individual but the social loss cannot be eliminated. If the property of a person is lost by fire, he will be compensated by the insurance company. The loss of goods will remain as a social loss. Insurance cannot eliminate loss but it can reduce the risk to the individual.
Insurance does not only protect risks but it provides an investment channel too. Life insurance provides a mode of investment. The insurance develops a habit of saving money by paying premium. The amount of policy is paid to the insured or to his nominees. In case of fixed time policies, the insured gets a lump-sum amount after the maturity of the policy.
In the same way, if a bread-bringing member of the family dies prematurely, the family is provided with money to continue with its livelihood. So, insurance gives security to both individual and business-man. These days insurance covers various social welfare schemes also. There are schemes providing for unemployment, sickness, accident, health and old age insurances. These schemes are helpful for poor people and help in establishing social justice.