In one form or another, we all own insurance. Whether its auto, medical, liability, disability or life, insurance serves as an excellent risk-management and wealth-preservation tool. Having the right kind of insurance is a critical component of any good financial plan. While most of us own insurance, many of us don't understand what it is or how it works. In this tutorial, we'll review the basics of insurance and how it works, then take you through the main types of insurance out there. Insurance is a financial topic of paramount importance for every individual. Insurance is designed to protect the financial well-being of you and your dependents in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policy creates a contract between you and the insurance company. In exchange for payments from you (called premiums), the insurance company agrees to pay you a sum of money upon the occurrence of a specific event. That event may be as mundane as a visit to the doctor or as serious as a car crash, depending on the type of insurance.
After contacting an insurance company about entering into a policy, you will receive a quote, which is the total amount of money you will need to pay over the term of the insurance policy in exchange for coverage. When you have agreed to pay this amount and the insurance company has agreed to insure you, you will receive a copy of the policy detailing the terms and conditions of your policy.
If an insured incident occurs, you will make a claim for payment from the insurance company. You will receive the amount you are insured for in the case of the specific incident minus a deductible that you must pay for each claim. Higher deductibles are associated with lower premiums and vice versa. Therefore, for claims that are likely to be made, it may be in your best interest to pay a higher premium in exchange for a lower deductible.
Meaning of Insurance-
Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company.
A pool is created through contributions made by persons seeking to protect themselves from common risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool.
Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type.
Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.
The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'.
Concept of Insurance / How Insurance Works
The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.
Many people buy insurance, but usually because they have to. This is especially true with car insurance since 49 of the 50 state require car insurance to operate a motor vehicle on the road. The same can said of other types of...