How Does Insurance Work?


Quick Answer

Insurance is essentially a group-oriented risk management strategy: insurance companies cover individuals and families in the event of losses and accidents by pooling money received by people with similar risks, which allows the sharing of losses and expenses. Insurance acts as a protective mechanism for citizens and companies. It requires some financial sacrifice by customers, but those people in turn receive financial coverage in the event of unforeseen accidents, ensuring they never have a total loss.

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Full Answer

Insurance comes in many forms, including auto, life, health and homeowner's insurance. The concept of insurance dates back to the days of whaling and trans-oceanic journeys, when merchants placed goods and products on multiple ships, protecting themselves against total financial loss in the event of a ship wreck or sinking.

Insurance today operates much the same way. Stakeholders pay fees to individual insurance companies, who in turn reimburse them for losses in certain situations. People and organizations pay annual fees, and choose among different rates and packages suitable for their lifestyles and income levels.

When accidents occur to those under insurance protection, insurance companies take money from the collective pool to help pay claims and expenses. Insurance offers protection through policies, which serve as legally binding contracts. Policies outline coverage and payment. Insurance requires payment of a premium, which companies use to pay claims, offset the cost of buying and selling insurance and investments.

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