What is Insurance?
In olden times, people used to pool their money and whenever the hardship happens to anyone, the pooled money is used to cover his losses.
Suppose there are 10 egg traders who put all the eggs in one basket and then the basket falls and all the eggs are broken.
So to avoid all losses they spilt all their eggs and put it in different baskets.
Then even if 1 or 2 basket’s eggs break, people still have some of their eggs. On this basic idea, you can understand the idea of insurance.
As all of you know, everybody cannot afford whole expenses of medical bills, housing, and any unfortunate calamities which come in their life.
By pooling money, not only you are getting insured but also you can help others who genuinely need your money.
Everybody wins by just paying a premium amount.
How Premiums are Calculated
You just can’t predict the no. of claims which are going to happen, also the insurer must have premium money in advance in order to cater the losses and unfortunate accidents like accidents, fire, etc.
So on the basis of previous claims and events, the insurance companies settle the premium.
There is a process known as “underwriting” in which the insurance company evaluates the risk of the client, and on the basis of the risk factor associated with him, they calculate the premium.
If the risk factor is very high, then the insurance companies refuse to give insurance.
They ask us to do several tests of the body and our assets if we are smoker or non-smoker, do we consume alcohol or not? Based on all the considerable factors our premium is calculated.
The deductible is a term which is used in insurance policies where the insured has to pay a fixed amount from his pocket to cover his loss.
For ex – if you have a car accident, which gets a damage of 10000 $, and you have a 3000 $ deductible, so the insurance company will pay you 7000 $ and you have to add 3000 $ from your pocket.
Higher the deductible lower the premium, Read the policy carefully to know the exact terms and conditions.
It is a fixed amount that the insurance company will pay you regardless of your actual loss.
There are also a lot of frauds which happen such as padding, manipulating the actual event severity.
There are a lot of incidents happened where people deliberately hurt themselves, I have an incident where someone tries to murder himself by hiring assassins.
So How come the Insurance Companies earn money?
Well, they pool our money and invest it in stock markets and other financial instruments.
Insurance companies in India like LIC, ICICI, etc make billions of rupees of profit on our money every year.
People think that if they take an insurance policy and do not claim it, their money will be wasted.
However, it is not an investment, it is a protection to your life and assets.
Nobody has seen the future, what if anything happens to you, will you give those huge medical bills in a hard time?
There are different insurances with different policies.
Read all the conditions carefully, ask your agent to explain it to you.
Read: How banks make money