In the simplest way, insurance can be seen as protection against financial hardship due a loss resulting from an event or risk insured against, or a risk management device. It can often be a concept that is hard to sell to anyone, especially since it sounds so negative. Insurance in the best of light can be the epitome of the saying “better safe than sorry”, or in the worst case scenario something to guard you against Murphy’s law that “if something can go wrong, it will.”
The Basic Principles
Premium Payments- these are the periodical amounts that an insured will pay the insurer to be covered from the particular risk he is exposed to, the cost of which will be spread out to people under the same risk. The computation of these payments depend upon the following factors: the risk or the event, the exposure, the circumstances that may affect the level of exposure, the number of people under the same risk, and the presumed cost of the loss. This is why some people pay bigger premiums than others, it’s because they are more likely to be in the position to need indemnification.
Risk- is a possibility that something will happen that will result in damage or loss. The basic premise is that this risk does exist, but the time of the event that will cause the damage is unknown, and though it may be known, it will not be stoppable. (The way that fire is a risk, one knows that it can happen, but not always when. Or in the case of tornadoes, there are places that are prone to tornadoes, but nothing can be done to stop one.)
Indemnity- the worth of an insurance policy or the “pay-out” is the amount of indemnity (payment for the loss due to the risk insured against). In case of material goods, this is often less than the fair market value of the goods or the thing insured (like a car or a house), but for human life that has no monetary equal, it can go as high or as low as the policy holder can afford. Life insurance does not repay the loss of the life, it is only something that will ease any financial hardship that such a loss can cause.
There are ten people living in an apartment building, with the same jobs, and the same properties. They are all exposed to the same amount of risk of the building getting caught on fire. If one tenant, however stores legal but flammable materials in his apartment, his risk is higher, therefore he will pay a higher premium. If one other tenant has decided to “fire proof” most of his properties, his premium payments will go lower. If the apartment building is near a fire station, the risk of damage is also reduced, and the premium payments also go lower. If the building is near a flammable chemicals plant, that premium payments will go higher. These are all very simplified explanations, of course, but it’s only meant to give a better understanding to the uninitiated.