Back to basics: What is insurance?

understanding insurance premiumunderstanding insurance premium

It’s everywhere, but you rarely think about it. It protects you, but you cannot see or touch it. You pay for it, but hope you never have to use it. This is insurance.

Understanding the basics of insurance

Sharing Risk, Pooling Funds

Insurance is our society’s method of managing risk. At its most basic, insurance is just a group of people who place money into a common fund. When someone in the group suffers a loss, that person can dip into this common fund to cover the loss. Insurance will not pay for every problem that you may encounter, and it isn’t a maintenance contract.


Insurance is generally intended to help you cope with the financial consequences of unpredictable events that are sudden and accidental. The lucky ones will never have to use this fund; the unlucky ones will be glad that it’s there. One of the purposes of insurance companies is to manage risk and regulate these funds.


When you buy insurance, you essentially enter into a contract transferring risk to the insurance company in exchange for a fee; this fee is called a premium. Those that are more likely to draw from the pool because they have a higher risk or those that consistently dip into the fund with frequent or multiple claims will pay higher premiums than those that are less likely to draw from it.


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How can insurance help you?

Insurance helps you:

  • Own a home, because mortgage lenders need to know their collateral is protected
  • Drive vehicles, because the law states vehicles be insured and few people could afford the repairs, health care costs, and legal expenses associated with collisions and injuries.
  • Maintain your current standard of living if you become disabled or have a critical illness.
  • Adequately cover the costs of prescription drugs, dental care, vision care, and other health-related items.
  • Provide for your family in the event of a death.
  • Manage the risk of owning a small business or family farm.
  • Enjoy worry-free vacations.


Insurance: It shouldn’t have to be a riddle

Know what you’re paying for

Buying insurance can’t protect you for every possible type of loss. It is very important to read your policy and know what’s covered, what isn’t, and which coverage options have limits.


Your insurance advisor should be able to clearly explain your policy to you and answer any questions that come up. A little knowledge can make a big difference when it comes to buying the right insurance protection for you and your family.


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