Insurance

What is an Insurance Policy?

An insurance policy is a product that the insured purchases from the insurer. In exchange for the premium that the insured pays, the insurer will cover the cost of a particular event happening in the event that it should occur. For instance, if you insure your laptop against theft, then the insurance company will buy you a new laptop if it should get stolen. In exchange for this understanding, you will make regular payments to the insurance company which is known as the premium.

Why Do People Take Out Insurance Policies?

Insurance policies serve two purposes, in that they give the insured peace of mind, and they also mitigate risk. In the example above where someone has insured against theft of their computers, they have probably done so because they don’t want to worry about it. It’s unlikely that losing a laptop will ruin a person’s life, but it will represent an inconvenience and there will be a reasonable cost involved in replacing it. People also take out insurance policies in order to mitigate risk which could seriously damage them financially. For instance, a pub owner would take out fire insurance in case the building burnt down. Without insurance, the pub owner would likely suffer serious financial hardship if overnight he had no pub, no income and nowhere to sleep.

Why do People Not Insure?

People generally don’t insure because the cost of the policy outweighs the perceived risk. An insurance policy can be expensive especially if the risk is high. Some people find it more appropriate to mitigate their own risk. For example, you may avoid paying the premiums for car theft insurance by mitigating it with safer car parking practices. If you take more care, you are less likely to have an accident and this principal can be applied to most insurance policies with the exception of natural disaster policies.

What Kinds of Things Can Be Insured?

You would be surprised the kind of things that can be insured against. The obvious ones are car insurance and home and contents insurance. Less common ones would be mortgage insurance to cover the event that a money borrower absconds on their loan. Most insurance companies will insure pretty much any event that might happen, and will generally be willing to design a specific policy that will only apply to you.

What Affects the Cost of Insurance?

The cost of the insurance is determined by the risk of the event happening and the cost that event will ultimately cost. Embedded in that will be a profit outcome, which is the end gain the company wants to achieve. The premium you pay will reflect mainly those three things. With car insurance, your risk is effectively spread among other drivers and the insurance company makes a profit from providing this service.

When Are Insurance Payouts Not Paid?

Generally, insurance payouts are made when the agreed event happens. For instance, if your laptop is stolen and you report it to the police, you will get a report number that you forward to your insurance company. The insurance company will generally then give you enough money so that you can buy yourself a new laptop. However, if the insurance company discovered that you deliberately caused the laptop to be stolen because you wanted a new one, then they do not have to pay because that would be insurance fraud.

So there you have an introduction to the world of insurance. Checkout the rest of the site where you’ll find detailed information on all the different kinds of insurance so that you’ll be better informed when you’re setting up a policy.