What is Insurance and How Does it Work? - School Contents

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What is Insurance and How Does it Work?

For academic purposes or if you just want to have some background information on the concept of insurance, insurance policies, and types of insurance policies and plans, you will find this post and the linked ones very briefly resourceful.

What's Insurance?

Insurance is a contract in which an insurer (insurance company) indemnifies another against losses from specific contingencies or perils. It's the protection from financial loss in which, in exchange for a fee, a party agrees to guarantee another party compensation in the event of a loss.

Bringing this to the business arena, insurance policies are sold to people and organizations (insured) just like any other product and service. Hence, it's safe to say that, insurance is a financial product sold by insurance companies to safeguard you and/or your property against the risk of loss, damage, or theft (such as flooding, burglary, or an accident).

How Insurance Work for People and Business

If you buy an insurance policy which can be any type e.g. home, car, health, business, retirement, etc., you've only joined a group of people (policyholders) who wished to protect themselves again the same or similar loss.

Of course, you'll be required to make a regular contribution to the insurance company, alongside other policyholders. This regular and definite contribution is called the premium.

The insurance companies are aware that all members of the policies will not incur losses, at the same time. And usually, in most cases, a few will suffer such damages across the lifespan of the plan. 

Therefore, when one or two people, which is usually the case, suffer the loss, they're compensated or reimbursed from the entire premium of the large number of the members in the policies. This is why insurance is called "the pool of risk".

In case you're curious to know how insurance companies make their own profit, that will be concisely the total premium minus the few claims paid out. Insurance companies equally make more profit from investing premiums in other or related businesses and financial assets.

Types of Insurance and Making the Right Choices

There is no specific number of insurance policies. It all depends on the products a company wishes to sell or has the resources for.

Commonly, we have among others, the following types of insurance policies.

  1. Life Insurance
  2. Vehicle/Car Insurance
  3. Health insurance
  4. Travel Insurance
  5. Property insurance
  6. Mobile Insurance
  7. Cycle Insurance
  8. Bite-size insurance
  9. Renters Insurance
  10. Umbrella Insurance
  11. Fire Insurance
  12. Marine Insurance
  13. Senior Citizen Health Insurance

In short, if an insurance company deems it fit to launch a plan, it may name that policy after the idea or the problem it's aimed to solve. A company can create a product about tourism, real estate, industrial disaster, construction collapse, agriculture, retail, etc.

Key Points To Remember About Insurance and Policies

  1. You don't buy an insurance policy unless you truly need it or else, you're only paying for those who will need to be compensated
  2. You're limited to a single insurance policy. You're free, as may be needed, to opt-in for different policies and plans. Hence, if you will need it for, health, home, car, business, or retirement, it may be worth it
  3. Depending on the plans/policies, you won't be covered, in full, in all damages. Some policies may cover the  replacement or just the repair
  4. There is no specific amount for the premium. It depends on your policy and related factors. 
  5. Damages are only paid if the insurance company is convinced, after investigation, that it's not as a result of intention, negligence, or self-imposed loss.


This piece, as you can see, is just meant to educate and expose you to the concept of insurance, as broadly. Resources for more exposure will be provided as new posts will be added in the future. In the meantime, you should consider checking the available links within the posts for further understanding of the linked words.

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