Insurance Series: What is Insurance?
You might have heard the word insurance get thrown around in conversation, but why does it matter and what does it mean? It sounds boring, but insurance is actually really important!
For most people, if significant damage to their property happened tomorrow, they wouldn’t be able to bear the cost of it. Insurance serves as a guard against this by taking on that risk and either covering or helping to cover costs if something does happen. The reason insurance firms still generate profit is because they have many customers, all of whom are paying and only some of whom will actually need insurance coverage. Through pooling client risk, insurance firms ensure that they make money.
The 4 main types of insurance are life, health, auto, and home insurance. (Article coming on those next!) Businesses also use insurance, though they require more specific types of insurance to account for a larger variety of potential damages.
An insurance policy typically has three key components: the premium, the policy limit, and the deductible. A policy’s premium is the price the client pays to the insurance firm. This price is often a monthly expense that is determined based on the client’s credit score and history. For example, a client with a history of driving incidents won’t get as low of a price as somebody with a cleaner record. Second, the policy limit is the maximum amount that will be covered in an incident. Typically, a higher premium would allow for a higher maximum limit, which helps insurance firms to handle risk and make money. The deductible is the amount that the client has to pay before insurance kicks in. This usually means that people only involve their insurance firm for serious damages. The deductible, limit, and premium vary in their exact terms and details, but are crucial to understanding what an insurance plan can do.