What is Insurance
Simple words, insurance is a financial agreement between an individual (insured) and an insurance company (insurer) that protects the individual from financial losses in certain events.
The insurance company (insurer) hedges against financial losses by collecting payments (premium) from insureds every period/month, making it into a fund pool, and the fund pays out when those insureds experience a loss.
Core component of Insurance
- Risk Pooling: Many people contribute premiums into a fund, and the fund pays out to those who experience a loss.
- Risk Transfer: The insured transfers the financial risk of potential losses to the insurer.
- Premiums: Regular payments made by the insured to maintain coverage.
- Policy Terms: Agreements that outline what is covered, exclusions, and conditions.
- Claims: Requests made by the insured for compensation when a covered event occurs.
- Policy Limit: the maximum amount an insurer will pay for a covered loss under a policy.
- Deductible: Specific amount paid out of insured pocket before the insurer pays a claim.
How insurance works?
There are many types of insurance available, including health, auto, legal insurance, saving plan etc. The insurer contracts with the insured, covering specific risks in exchange for regular premium payments.
Premiums are collected periodically and pooled together. The insurer invests this money to earn more, then uses the funds to compensate insured when a covered event occurs.
With a larger pool of insured individuals, premiums become more affordable, as the risk is shared across the group. This allows insured to receive compensation when needed.
Policy Limit
The policy limit refers to the maximum amount an insurance company will pay for a covered claim. This limit can be set in various ways, such as per event, per policy term (usually a year), or as a lifetime maximum. It’s important to note that higher policy limits typically come with higher premiums, as the insurer is taking on a greater financial responsibility.
Summary
Insurance is a protection against unexpected financial losses. The insurance company pays you or someone you choose if something bad occurs. If you have no insurance and an accident happens, you may be responsible 100% for all related costs.
