The insurance industry grew out of the need by individuals and businesses to cover unforeseen financial losses related to property damage, health, death and legal aid, among other things. It is a system that allows people financial security to fall back on, should any of the above events occur. Forms of insurance may by private, state (including benefits), or part of an employer employee contract.
The system primarily works between two parties. An insurance company that sells the insurance and the customer (potential policy holder) that buys the insurance. There may also be an insurance broker that acts as a middleman between both parties. The insurance company is known as the insurer, and the customer, once they take on the policy is known as the insured, or policy holder. Often before any agreement goes ahead, the company will give an insurance quote or insurance rate to the customer, outlining the cost of the policy. This is determined by a number of factors, but mainly the risk of the insured needing to payout. Thus as par the agreement of the insurance policy, the insured will pay a regular amount of money in to the policy (known as a premium) that is theoretically used in part to cover the losses, should a pre-agreed event occur, which is dependent on the type of policy. For example in life insurance, a payout is made when the policy holder dies and in medical insurance a payout is made when the insured needs to pay medical bills.
Like a bank, the premium (money paid in), is used by the insurance company to invest and make a return, with the hope being that they make enough to make a profit and cover any payouts relating to the policy. When the insured feels they meet the requirements for a payout they will make an insurance claim, and if the company agrees the payout process will go ahead.
There are many types of insurance, often differing slightly from case to case. Common insurance policies include:
Auto Insurance (Car Insurance) covering costs associated with vehicle damage and accident liability.
Travel Insurance covering losses associated with overseas theft, loss of baggage and delays.
Health Insurance covering losses associated with ill health and being unable to work, as well as direct medical costs.
Home Insurance covering any physical damage and sometimes the contents to a home.
Life Insurance covering the losses and costs associated with the death of a family member and income earner; often linked to Term Insurance.
Business insurance covering a whole host of potential business related losses.
Dental Insurance covering the bills specifically related to dental care.
Medical Insurance covering medical bills.
Disability Insurance covering losses and costs associated with having a disability and being unable to work.
Hazard insurance covering the costs related to the occurrence of various hazards.
Endowment Insurance a form of life insurance often linked to a mortgage.
Group Insurance a policy offered to a whole group of people, usually under the same employment.
Liability Insurance covering legal costs and compensation associated with a business that is liable for something, such as an employee accident.
Insurance policies are based on risk. If the insured is at a high risk of cashing out their policy, then their premium will be high to counteract potential losses to the insurance company. For example somebody with a terminal illness is very likely to cash out a life insurance policy, and therefore their premium will be off the chart; thats if the company sees them as insurable at all. Insurability is calculated by the risk involved. Sometimes an insurance company will seek re-insurance from another insurance company to lower premiums or hedge the risk of their own portfolio.
Sometimes insurance is not always financially viable for those that need it, due to the premiums, so co-insurance is taken out where two people take on the payments, or the inured agrees to pay a percentage of every payout, out of their own pocket, thus reducing the premium. In some cases of life insurance policy holders in financial trouble can cash out early for a lower cash surrender value.
Another way an insurance company may protect themselves is with a deductible. This is usually a small amount of money that must be paid out of the policy holders own pocket before the policy coverage begins. Using auto insurance as an example, there may be a deductable amount of $500, so if the insured has a small accident, such as a wing mirror sideswipe, they will cover this cost themselves. If there was a major accident of over $500, then the insurance company would make a payout.
For those that really cannot afford insurance, or who are already on the poverty line, various governmental benefit programs are used to help.