Insurance Basics

What is insurance? Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. A simpler way of putting this is that, insureds pool their premiums (monthly payments) to share in a possible loss. Should harm befall one of the members of the group, this pooled money is used compensate that individual for that loss. In this way the risk of harm to an individual, caused by a loss, is transfered from the individual to the group. What this means to you. In a basic sense, what this means is that you and others like you pay your premiums into a pool. If one of you (who has payed into the pool) gets sick or needs medical attention, the money to pay for this care comes from the pool. In this way you are sharing the risk of financial loss due to a sickness or injury. Now in real life it is a bit more complicated, but this is the basic idea. Types of Insurance There are many types of insurance. Health, Life, Auto, Homeowners, etc. Some you might be more familiar with than others. Here we will discuss life insurance and health insurance. Life Insurance policies are policies that while in effect, pay whenever death occurs. There is assumed to be a monetary loss (in addition to the emotional loss), which occurs with a persons death. This loss could include the loss of a persons income to provide for remaining family members or the cost of final expenses. The two most common forms of life insurance are Whole life insurance and Term life insurance. Whole life insurance is a policy that as long as the premiums are paid, pays out the face amount (amount policy pays at death) at death. For these policies death is assumed to occur at 100 years (or in some cases 96, 97, etc), which means should the insured still be alive they receive the face value of the policy at that time. This type of life insurance then becomes part insurance protection and part savings plan. Term life insurance is intended to insure against an individuals death within a certain window of time, say 5 years, 10 years, 20 years, etc. The type of policy can help make sure a surviving spouse is provided for, has sufficient funds to make sure the children are raised, or pay of a mortgage to keep the house, or to pay for final expenses. Accident and Health Insurance is insurance which provides protection against financial loss brought about by medical conditions. Accident and health insurance protects against, medical expenses, hospital and physician costs, accidental death and dismemberment, skilled nursing care, and many other expenses. There are two main types of health insurance, these are individual health insurance and group health insurance. Individual Health Insurance - Individual health insurance is offered on an individual basis. Here individual could mean a single individual or a family (yielding a family health insurance policy). In this case an individual (or family) works directly with an insurance company to generate a policy (or a contract specifying how much premium the insured pays and what kind of risk the insurer will cover). Group Health Insurance - Group health insurance is usually offered through your employer or through another organization (i.e. professional groups or organizations). In this case the employer contracts with the insurer to create a policy which covers the employees (or employees and their families). Often the employer will pay part of the premiums. Small business health insurance is a subset of group health insurance. * The above information is intended to give the reader a basic introduction to insurance and is not meant to be comprehensive.

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