How does insurance work?
Insurance is a way to protect yourself from losing money in a wide range of situations. It is a contract in which one party agrees to pay for the financial losses of another party caused by a certain event.
The way insurance works is by spreading out losses. If you want to be protected against any kind of loss, you must agree to pay regular payments to an insurance company. These payments are called premiums. In exchange, the company gives you an insurance policy, which is a contract. The company says it will pay out a certain amount of money if the type of loss listed in the policy happens.
History
Insurance has been around for a very long time. The Code of Hammurabi, a set of Babylonian laws from 1700 BC, is thought to be the first form of credit insurance. A person didn't have to pay back a loan if something bad happened to them that made it impossible to do so. The Great Fire of London in 1666, which burned down 13,200 homes, was the start of insurance as we know it today. Nicholas Barbon opened a business to insure buildings after this disaster.
Insurance Policies
Insurance usually covers situations where there is only risk of loss, or where only losses can happen. Examples of these are fires, floods, and accidents. People also buy insurance to cover unusual types of financial losses, like a dancer insuring her legs against injury. Most insurance policies are one of these three types:
- Life Insurance
A life insurance policy says that when the person who has the policy dies, the insurance company will pay out a certain amount. This can be given to the beneficiary all at once or in instalments. The beneficiary is the person or people named by the policyholder to get the death benefit. Some types of life insurance also give policyholders the chance to save money. These policies can be cashed in. The cash value can be used to get a loan or the policy can be turned in for the cash value.
Annuities
These are savings plans that insurance companies sell to help people get a steady income in retirement. If the annuitant (the person who owns the annuity) dies before getting the guaranteed number of payments, the insurance company must keep making payments to the beneficiary.
Dividends
Dividends are a way for some insurance policies to give back some of the premiums. Participating policies are the name for these kinds of policies. A company pays dividends if the money it gets from premiums is more than what it costs to pay out benefits and run the business. Dividends could also be a share of the company's profits from investments made with premium money. Most of the time, dividends are paid on life insurance.
- Health insurance on your own
Health insurance helps pay for hospital stays, surgeries, lab tests, medicines, and other medical care. The rising cost of health care has made it even more important to have good health insurance. Without this coverage, you could have a hard time making ends meet, especially if you got sick or hurt badly.
Dental insurance is one of the types of health insurance that is growing the most quickly. It helps pay for a lot of different kinds of dental care.
- Insurance for property and liability
Property and liability insurance are things that people and businesses buy to protect their assets from financial loss. Property insurance pays the policyholder directly if their things are damaged, destroyed, or lost because of a peril. Liability insurance protects people and businesses from possible financial losses that could happen if their actions hurt other people or hurt their property.
The main types of coverage for one person are:
- Insurance for Homeowners
This protects the owner against losses caused by damage to their home and its belongings.
- Automobile Insurance
This is the kind of insurance that most people buy and that is the most important. Drivers have to pay for any costs that come up because of accidents they cause. The person who buys this insurance is protected against financial losses caused by accidents.
Insurance companies' ability to make money
When buying an insurance policy, you should think a lot about how stable and strong the insurance company is. When you pay an insurance premium now, it covers losses that could happen many years from now. Because of this, it is very important to make sure that the insurance company is still in business. In the past few years, a number of insurance companies have gone bankrupt, leaving their customers without coverage (or coverage only from a government-backed insurance pool with less attractive payouts for losses).
How People Buy Insurance
Agents are the main way that most insurance companies sell policies. Exclusive agents work for an insurance company and only sell policies from that company. Independent agents sell policies for several companies.
