What is insurance and how does insurance work? Learn the basics on insurance and most insurance policy types.


What is insurance and how does insurance work? Well the term insurance or insurance policy is very simple explain but not so simple to understand.

Insurance contract or insurance policy, is signed.
Insurance contract or insurance policy, is signed.

Insurance is a type of system under which one party, the insurer promises to reimburse or to provide services to the the other party the insured  in the event that particular occurrences on certain circumstances result in particular losses for the insured during a period of time covered by the contract length. The conditions and prices are normally set prior to the insured period starts and before the insurance contract or insurance policy, is signed.

In other words insurance represents a way to cover your risks of every day paying a small fee monthly for repairs or reimbursement for lost goods or damages covered in the contract. This way you are transferring the risk of a financial or non-financial loss that could happen to you but it’s not guaranteed to happen.

All you have to do as the ensured is to pay a monthly or a yearly fee to the insurance company you signed the insurance contract with. You can insure your vehicle, property, health, life, business, phone, limbs.. Well, you can insure just about anything you own for a certain time period and for a cost proportionate with the value of the object insured. The insurer on his side has to pay for the financial damages of the insured in case of any damages covered by the insurance contract gets reported and proven.

What is insurance and how does insurance work?
What is insurance and how does insurance work?

How and why can insurance work for so small fee?

Insurance depends fully on the large numbers of clients accessing insurance from the same insurance provider. If the group of insured persons is large on the grand scale the insurance company’s profit outweighs by far the demand in cash needed to cover for the insured incidents.

This process is called “risk pooling”

The concept of risk pooling means buying any type of insurance policy from the ensuring firm with specific events to ensure and pay monthly installments also known as premiums. Premiums are calculated to cover for the specified product that needs to get insured and the sum of money they cost depends on the value of the insured product. The insurance company collects premium from all clients insured and creates a large pool of money. This pool of money is then used in the eventuality of any client need to be covered by their policy. This pool helps the insurance company pay for all losses occurring covered by the policy contract.

The ensured has to claim the policy during the specified policy period

If a claim is not done during the specified policy period, all benefits will be lost. Make sure as an insured to read and learn all that is to learn about your insurance policy so you can stay within the contract limits and be safe.


The most common insurance types:


Property Insurance Also Known As Liability Insurance

Property insurance is used to insure against loss from accidental damages or total destruction of property you own. An example of property insurance is homeowner’s insurance.

Car Insurance Also Known As Auto Insurance Or Automobile Insurance

Car or auto insurance is the most used types of personal insurance and is mandatory in most countries in the world in order to drive legally. In other words you cannot be on the streets inside your car if you do not have a valid auto insurance policy.

Life Insurance and Health Insurance

Life insurance is a way to financially protect your family in case one member dies an early as specified in the life insurance policy.

Health Insurance is a way to ensure your family members, including you of course, to get the required medical care without  supporting the cost of hospitalization and medicine. Some countries demand that you have a valid international health insurance before they issue the visa for travel.

Marine And Air Insurance Also Known As Transportation Insurance

The title is self explanatory as well. You need this insurance for your travels with airplanes or cruise ships or even if you work onboard planes of sea going vessels. It is not a mandatory insurance but it is recommended.

Theft Insurance

The theft insurance is made to cover any act of stealing of property and the price paid depends on the value of the property. This insurance can be burglary insurance, robbery insurance, and any other type of crime insurance that leads to your property damage.

Industrial Injury Insurance Also Known As Workers’ Compensation Insurance

This type of insurance policy works for the insured when they suffer losses at work, because of work-related injuries accidental or non-accidental depending on the policy requirements. In other words payments will be made to the insured party regardless of the blame. Usually the insured negligence could be the cause but still the insurance is made in such a way as to provide protection even in this case.

Credit Insurance

Credit insurance an important risk management instrument. The risk of total loss of savings from your bank’s bankruptcy  probability made this insurance policy necessary for people. Credit insurance basically transfers the risk from the insured balance to the insurer’s balance sheet removing the credit risk from the insured balance sheet.

Peace of mind – Insurance exists for your safety and comfort

Peace of mind - Insurance exists for your safety and comfort
Peace of mind – Insurance exists for your safety and comfort

Insurance policies help reducing the stress you can suffer during unwanted and unforeseen difficult times and the premium you pay to the insurance company is the price that secures your safety. The insurance company will have to cover any damages covered in the policy. The peace of mind comes with a small cost every month and this is why each and every one of us use insurance more and more from the devices we own to our lives and family. Even if you die, the insurance you made before will cover for the expense stress your family will have to endure and in some cases even cover for children’s schooling costs depending on the contract you signed.

Owning insurance became an essential part of financial planning either for you or for your family, your business or just your travels. We cannot do anything without insurance and feel safe anymore. We all are dependent on a good insurance level. In conclusion, insurance is good and you should get yours as soon as you can.

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