What Is Insurance? How Does Insurance Work?

The world we live in is full of insecurity. Anything can happen at any time. Your home may be burgled, your car can be stolen or your business premises may catch fire, destroying all that you have. More importantly, a freak accident may deprive you of your capacity to earn your livelihood or even kill you. Have you ever thought about what will happen to your near and dear ones if that happens? Even though such incidents are very common we live with a false belief that we will remain untouched by such misfortunes. It is time to get rid of such a false notion of security and get the right kind of insurance cover. The importance of insurance can never be overstated. 

What is Insurance?

Let us first understand what insurance is.  Insurance definition by authors can be varied. But in a nutshell, we can say that it is actually a legal agreement between the insurance company (known as the insurer) and an individual or a business entity (known as the insured). In this agreement, the insurance company promises to make good the losses incurred by the insured, in return of which the insured is required to pay a certain amount, known as the premium, at a specific interval. However, there is more to it than just that.

A Look At The Categories of Insurance:

There are two basic kinds of insurance policies; the term insurance and investment insurance. While the former is a pure insurance product that provides only the protection against the insured unforeseen event the later also offers an investment opportunity along with protection, as a result of which it costs slightly more. That is not all. As contingencies are varied, the nature of insurance is also varied and it is for you to choose the correct policy. For example, you can choose from life insurance, health insurance, car insurance, fire insurance, theft insurance, etc.

How Does Insurance Work?

Now, you may wonder how the insurance companies can afford to compensate each of their clients and yet earn a profit. To get the right answer, let us look into the features of insurance. As we understand, the process works on the basis of shared risk. It means that the risk is spread over a large number of people, out of whom only a small percentage will need to be compensated. This enables the company to provide a large amount of compensation even though the premium was low. So we see that the greater is the number of insured easier it is to provide the indemnity.

Providing Protection is Not Its Only Role:

But if you think providing protection is its only purpose you are wrong. The functions of insurance can be varied.  Many people look at insurance as an effective investment vehicle. Some companies also provide a pension scheme and you can buy it in order to secure your old age. But most importantly being adequately covered by proper insurance schemes allow you to lead a tension-free life. Get your insurance coverage today to lead a peaceful life. Tomorrow may be too late.

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