How to Understand How Insurance Works
If you watch enough television or read enough magazines, chances are you have come across advertisements for various forms of insurance. Insurance companies offer coverage for practically every aspect of your life. Just to name a few examples, there is life insurance, health insurance, homeowner's insurance, renter's insurance and car insurance. The advertisements make having insurance seem worth your while. But before you purchase a policy, understand how insurance works.
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Instructions
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Write down a list of things that are important to you. Place items such as "car" or "my health" on the list.
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Imagine the losses you would experience if something tragic happens to one of the things on the list. Think of the cost of the medical bills if you get sick or the cost to repair or replace your car if it is damaged or stolen.
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Consider how helpful it would be if someone were able to compensate you for your losses if an accident occurs and damages one of the things on the list. Imagine that policies for different losses existed for each item on your list and that you could pay to protect the items on the list.
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Ask yourself if you would be willing to pay a periodic fee (such as a monthly or yearly payment) to a company to compensate you for loss should it occur in the future. This is how insurance works: You pay a fee (called a premium) to an insurance company; in return, the company compensates losses that occur to items covered by your policy.
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Multiply your example by all the millions of other people who also have a list of things to protect. The insurance company is also collecting premiums from them. This allows the insurance company to have enough money to pay you the whole cost of your totaled car even though you paid the company only a fraction of the car's value in premiums.
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