How Insurance Works (The Basics)

In many aspects of life, there is a measure of risk. (Risk being Probability x Consequence). Buying Insurance probably won't stop a car from hitting you or your house from burning down but in certain situations it can help people deal with the Consequence.

Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. In simple terms, Insurance is a contractual policy that a company agrees to take on to protect against a persons risk. In return the policy holder agrees to pay an annual or monthly fee that is worth a fraction of the total risk.

There are many different types of risk so of course there are many different types of Insurance

Health- Health Insurance typically covers the cost of medical treatments and prescription drugs.


Life Insurance- One of the few insurance policies that you have to be dead to reap it. Life insurance helps the policy holder's family (or other designated beneficiary) recive some sort of monetary compinsation in the event of the holder's death.


Auto Insurance- This insurance protects you from financial loss in the event of a vehicular accident. Many states including Georgia require that all drivers have some sort of Auto Insurance.


Property Insurance- Property covers everything from Fire, Flood, and Earthquake insurance to the far less likely Volcano and Terrorist insurance.


Liability Insurance- Helps cover the policy holder against legal claims (like financial loss when losing a law suit.)


and many many more


Now like alot of things Insurance can have a dark side. First depending on the situation your insurance policy is probably not going to cover the entire situation. (Often only covers a %). In fact most companies will actively look for ways to pay you less or not pay you at all. Remember that Insurance companies aren't there solely for your benefit but like many businesses are seeking a profit.

They've also been accused of discrimination. An ederly person for instance will have a tough time finding health or life insurance because orlder people ususally require more care, in which many companies can't see a profit.