Most people will know something about insurance in some way. We've all bought insurance for our homes, cars, or credit, among other things. Insurance contracts are long, complicated, and have a lot of fine print. Even a lawyer would sometimes get lost in how complicated they were. But there are a few things that every insurance contract must have.
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Every insurance policy will cover a chance event that might or might not happen. This is the risk you want to protect yourself from. The event could be a house fire, a car accident, medical bills, or almost anything else. The only thing that isn't true is life insurance, which pays out if you die. This is something that will definitely happen, but the exact time of death is unknown.
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There must be some kind of loss that can be measured. Insurance companies will take on risks, but they have to be able to measure and estimate the loss. The insurance company needs to have a good idea of what kind of loss will happen if the event takes place. The loss must be able to be measured in terms of money. For example, you might be able to get insurance for medical bills or a new car, but you can't get insurance for the sadness you feel after an accident.
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The loss has to be clear. Again, insurance companies need to know what kind of financial risks they are taking on in order to set the price of the premium.
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The loss has to be a big deal. The cost of the insured risk must be high enough to cover the cost of running the insurance contract. Let's say you want to get a racehorse insured. Someone from the insurance company will come look at the horse, figure out how much it's worth, write up a contract that says what's covered and what conditions you have to meet, figure out how much the premium will be, and give you the contract. For a valuable racehorse, all of this work will be worth it. But if you wanted to insure your goldfish, it would be hard to see why you should go through the trouble of setting up a contract.
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The loss can't be a big deal. What is catastrophic will depend on how big the insurance company is and how much money they have. But the insurance won't help if the loss is more than the insurance company can pay for. For example, it is usually impossible to get insurance against an earthquake because the losses, if it happened, would be too big for the insurance company to ever pay out.
