What is Insurance and How does it Work?

what is insurance
It’s the protection from financial loss in exchange for a fee, a party agrees to guarantee another party compensation in the event of a loss.


If you are looking for 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 form of risk management in which a person or entity, known as the policyholder, pays a set amount of money, known as a premium, to another person or entity, known as the insurer, in exchange for financial protection against potential losses or damages. This protection is provided in the form of a contract, known as an insurance policy, which outlines the terms and conditions under which the insurer will compensate the policyholder for covered losses or damages. In other words, insurance is a way of protecting oneself against potential financial losses due to unforeseen events such as accidents, natural disasters, or other types of risks.

Insurance is a contract in which an insurer (an insurance company) indemnifies another against losses from specific contingencies or perils. It’s the protection from financial loss under 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 (the insured) just like any other product or service. Hence, it’s safe to say that insurance is a financial product sold by insurance firms to safeguard you and your property against the risk of loss, damage, or theft (such as flooding, burglary, or an accident).

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How Insurance Works for People and Businesses

When you purchase an insurance policy, which can be of any type, such as home, car, health, business, retirement, and so on, you are simply joining a group of people (policyholders) who wanted to protect themselves against 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 particular contribution is called the premium.

The insurance firms are aware that all members of the policies will not incur losses at the same time. And, in most cases, only a few will suffer such losses over the course of the policy.


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 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 roughly the total premium minus the few claims paid out. Insurance companies make more profit by investing their 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 product a company wants 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 Phone Insurance
  7. Renters Insurance
  8. Tenants Insurance
  9. Umbrella Insurance
  10. Fire Insurance
  11. Marine Insurance
  12. Senior Citizen Health Insurance
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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 disasters, collapsed construction, agriculture, retail, etc.

Key Points to Remember About Insurance and Policies

  1. You don’t buy an insurance policy unless you truly need it; otherwise, 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 and policies, you won’t be covered in full for 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 an investigation, that it’s not the result of intention, negligence, or self-imposed loss.


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