What is insurance & how it works?

We generally get advice from our friends and relatives to buy different kinds of insurance like health, life, and insurance to start a new venture.

But, usually, we ignore such insurance considering it as a wastage of money and time. But no matters how good you are doing financially, we all need insurance in our life. This is simply because insurance serves as a safety guard that financially shields you and your family during uncertainties. 

In this article, we will understand the meaning of insurance and how does it work?

Meaning of Insurance 

The concept of insurance is easy to understand. In simple language, you pay a monthly or annual fee (premium) to the insurer to protect your health, car, home, and life for a definite time period. After the happening of the event, the insurer compensates for the damages in case of any loss to the person or object. 

Therefore the client shifts the uncertainty of a financial loss to an insurance company. 

For example, if you get hospitalized due to a car accident, your health coverage policy will bear all the medical costs of the hospitalization. And, your vehicle insurance will compensate for the damages to your car. However, if you die in the accident, your nominee will receive a sum amount for your insurance policy.

How Insurance Works?

Insurance is a legal contract between the policyholder and the insurance company. 

There are many types of insurance, health, car, home, and Life insurance. In all cases, the insurance company (insurer) agrees to give a specific amount if the policyholder undergoes a loss clearly mentioned in the policy. The loss can be your car accident or even paying your huge hospital bills. 

To receive the insured amount from the insurer, the client has to pay a sum of the premium amount- monthly or yearly. The amount of premium is decided by the insurer by a process named underwriting. In this process, the insurance company investigates the creditworthiness of the person by considering many factors like credit score, insurance history, and age. 

The higher the uncertainty that you may suffer a loss or get a claim, the bigger your premium will be. 

The insurance company collects premiums from the client monthly or yearly and uses the amount to pay for losses covered in an insured event. You will get a claim if the insured event happens with specific terms and conditions. All the damages will have to be paid by the insurance company from the client’s premiums. 

 If the event does not occur in a specific period of time mentioned in the insurance policy, you might not get any coverage from the insurance company.

Reasons why all should get insurance?

  • It brings complete security to you and your family.
  • It helps in financial planning during an uncertainty.
  • It helps in minimizing the risk in the future.
  • Having an insurance policy brings peace to your life.
  • It increases your standard of living.

Bottom line 

Insurance is the most effective financial management tool which can protect you from financial risks occurring due to many situations. Though there are many uncertainties in life that you cannot alleviate, still, insurance will somehow help you to compensate for the financial risk related to the uncertainties.