Intro To Insurance: What Is Insurance?
By Cathy Pareto
Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium. (For background reading, see The History Of Insurance In America.)
Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. We say "significant" because if the potential loss is small, then it doesn't make sense to pay a premium to protect against the loss. After all, you would not pay a monthly premium to protect against a $50 loss because this would not be considered a financial hardship for most.
Insurance is appropriate when you want to protect against a significant monetary loss. Take life insurance as an example. If you are the primary breadwinner in your home, the loss of income that your family would experience as a result of our premature death is considered a significant loss and hardship that you should protect them against. It would be very difficult for your family to replace your income, so the monthly premiums ensure that if you die, your income will be replaced by the insured amount. The same principle applies to many other forms of insurance. If the potential loss will have a detrimental effect on the person or entity, insurance makes sense. (For more insight, see 15 Insurance Policies You Don't Need.)
Everyone that wants to protect themselves or someone else against financial hardship should consider insurance. This may include:
- Protecting family after one's death from loss of income
- Ensuring debt repayment after death
- Covering contingent liabilities
- Protecting against the death of a key employee or person in your business
- Buying out a partner or co-shareholder after his or her death
- Protecting your business from business interruption and loss of income
- Protecting yourself against unforeseeable health expenses
- Protecting your home against theft, fire, flood and other hazards
- Protecting yourself against lawsuits
- Protecting yourself in the event of disability
- Protecting your car against theft or losses incurred because of accidents
- And many more
Property and casualty insurance products for individuals that ...
Commercial insurance lines help keep the economy running smoothly ...
An insurance contract in which the insured provides a pool of ...
A party's total financial obligation when an insured event occurs. ...
A method used in actuarial analysis, which is often used in the ...
The difference between the final losses recorded by an insurer ...
Understand the difference between the various components of a life insurance policy including the death benefit and a policy's ... Read Answer >>
If you are the primary wage earner in your family and you carry a current mortgage on your home, it is important that you ... Read Answer >>
Understand what credit insurance is and how it protects companies against payment problems they may encounter in trying to ... Read Answer >>
Term life insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection ... Read Answer >>
Read about some of the largest and most influential companies in the insurance sector, a list that includes Berkshire Hathaway ... Read Answer >>
Discover why value investors should consider the insurance sector. Value investors look for extremes in valuation and sentiment ... Read Answer >>