First what’s the definition of insurance or what is insurance in simple words? What are the scope of insurance? Is it important to us?
In order to fully understand it let’s take a look at insurance terms and concepts, scope of insurance or the definition of insurance in simple words.
Insurance in simple words is a powerful product that can save thousands of people and businesses from financial ruin or financial loss. It’s a product that individuals purchase from insurance company in order to prevent themselves from losing money or their property. In addition, it’s a vehicle that can protect you from suffering a big financial loss in the event of an accident, in simple words it’s a way of safeguarding your finances.
There are different types of insurance, and purchasing what type of insurance you need depends in your current situation. Factors like employment status, lifestyle and age plays a vital role in developing or building your insurance portfolio.
However, most financial advisors recommend that we should all obtain three forms of insurance, the car insurance, health insurance and life insurance.
How insurance works or uses of insurance
Insurance is simply vague for starters, some might overlooked and underweighted its perks. Just to gain an insight about why you should, check it out
Insurance is all about the risk of you paying a fee so that the Insurance company will hold the risk of whatever activity you are doing. You pay fix amount each month or year, and if emergency cases occurs, then the insurance company will handle the payment that you need to pay. If it requires no payment, they keep the money.
In simple words, you are paying someone to protect you from a disaster or unlikely accident. If your house burns to the ground. You probably cannot afford a couple hundred thousand dollars to rebuild and replace everything. Not to mention finding alternate housing while yours is rebuilt.
If you were to rear end a brand new Lamborghini, you probably won’t be able to afford replacing it. But you probably can afford $100 a month in insurance.
Sure, you could save up the money yourself. But that won’t help if you crash into that $300,000 car tomorrow or next week or even any time in the next decade. Insurance pools the risk- even if someone gets into that expensive crash tomorrow, they will have enough money from collecting everyone’s premiums to pay to replace the car.
At the end, insurance companies always make money. However, payouts to individuals can be greater than what the person paid in.
Again for starters, if you have $100,000 in car insurance coverage, rarely are you actually going to pay $100,000 in. Most people are going to take less from the pool than they put in. However, for the rare person that does need that much insurance, it keeps them from going into life-ruining debt.
Also, they calculate insurance rates on a lot of factors. Accident history is one of them. If the insurance companies figure that a person who has X number of accidents, moving violations, etc. is going to, on average, cost them $Y. They’ll charge them at least that much. Car insurance also isn’t just for in case you mess up. They will pay for some things that are beyond your control, such as being hit by an uninsured driver for instance.