How Does Insurance Work?

Generating Link...
Insurance provides individuals and companies with protection against major financial losses resulting from damage or loss of property. In exchange for premium payments made, individuals and companies are guaranteed to get compensation or reimbursement in the conditions stated in the insurance policy.

Insurance has become a part of modern society. Life insurance and car insurance are the two most common forms of insurance. Health insurance and workers' compensation are also other common types of insurance. While insurance has become a part of most people's lives, not everyone understands how it works.

How Insurance Works

There are always risks in life such as fire, theft or earthquake. Many people hope to avoid financial loss by obtaining compensation for personal property that is lost or damaged.

Insurance is a way to protect personal finances from undue burdens. Insurance is a form of risk management in which risk is transferred to the insurance company in exchange for premium payments.

When buying insurance, a person gets an insurance policy which is a legally binding contract. This policy explains in detail all the rights, responsibilities and obligations of the insured (customer) and the insurance company. When a person suffers a loss covered by the policy, he or she can file a claim. A claim is a complete report of what was lost or damaged and its value.

The amount of money to be reimbursed (sum insured) is based on the amount contained in the policy. When an individual or company buys an insurance policy, all the money from the premium is then combined into what is called an insurance pool. Insurance companies use statistics to predict what percentage of the insured person or business will actually suffer a loss and file a claim.

Statistics also help determine the premium amount. Other factors such as credit score and previous claims are also taken into account. Since the majority of the insured incurred no loss or suffered only minor losses, the insurance company had an advantage that allowed them to continue operating and pay big claims every now and then.

Type of Insurance

In theory, there will be all types of insurance policies available for every situation. Anything that has a potential risk of loss or damage can be insured. A policy can cover several risks such as a home insurance policy that covers various losses such as due to fire, theft and earthquakes.

Several other types of insurance include life insurance, health insurance, and travel insurance. Property insurance protects against loss of ships, planes and agricultural crops. While credit insurance provides protection to pay off loans when the borrower dies, becomes disabled or loses his job.

When considering insurance, you must assess your situation and determine what is best for you, your family and your business.