What is insurance?

Insurance is a contract of insurance whereby a person or company receives protection or financial compensation from an insurance company. The customer's risks are pooled to facilitate payment by the policyholder.

The insurance contract is used to cover the risk of financial loss, large or small, resulting from damage to the insured's property or liability for damage or injury to others.


How the insurance works

There are several types of insurance and almost any person or business can find an insurance company that is willing to insure them for a fee. The most common types of personal insurance are car insurance, health insurance, home insurance and life insurance. In the US, most people own at least one car and are required by law to have car insurance.

Businesses need specific insurance to cover the specific risks they face. For example, a fast food restaurant needs insurance to cover injuries and damage caused by fried food. A car dealership has no such risk, but needs insurance to cover damage or injury caused during a test drive.


Policy components

When choosing an insurance policy, it's important to understand how it works.

Understanding these concepts will help you choose insurance that fits your needs. For example, is a particular type of life insurance right for you or not? Three factors are important for each type of insurance: the premium, the sum insured and the deductible.


Premium.

The premium is the cost of insurance, which is usually expressed as a monthly sum insured. The premium is set by the insurer on the basis of the insured's risk profile or the risk profile of their business, which may include creditworthiness.

For example, if you own several expensive cars and have a history of reckless driving, you can expect to pay a higher premium than someone with a regular car and a clean driving record. However, different insurance companies may charge different premiums for similar policies. So you'll need to do some research to find the right price3.


Policy limits.

Policy limits are the maximum amount an insurance company will pay for a covered event. Limits can be set for a period (e.g. per year, per policy period), per claim, per event or for the whole policy period (also known as lifetime limits).

The higher the limit, the higher the premium is usually. In a regular life insurance policy, the maximum amount payable by the insurer is known as the face amount, which is the amount payable to the beneficiary on the death of the insured.


Excessive risk.

An excess is a fixed amount that the insured must pay out of pocket before the insurer will pay the claim. The excess acts as a disincentive for a large number of small claims.

The excess may be charged per policy or per claim, depending on the insurer and the type of cover. Policies with very high deductibles usually have lower premiums because higher deductibles lead to fewer small claims.


Special notes.

People with chronic health problems or those who regularly receive medical care may want to look for health insurance policies with lower deductibles.

The annual premium may be higher than a similar policy with a higher deductible, but it may be worth it to have access to cheap health care for a year.