Saturday, July 13, 2024

How Does Insurance Work? – A Proper And Concise Explanation

You surely have a home insurance policy as well as a plan for your car, but do you really know how insurance works?

You do not need to know it to take advantage of it, but if curiosity has sparked you, then this article will explain it all to you.

Unlike other posts which make things excessively hard, this one will use layman’s terms, so you can get our points across very easily!

For Starters… What Is Insurance?

In simple terms, we can define it as a group of individuals who agree to share risks. By doing this your money is pooled with others’, so there is enough money to fulfill the claims.

However, this group is solely composed by persons who share similar risk characteristics, so that there is a fair distribution of expenses and losses.

Overall, insurance is a way to protect your car, property, etc. by pooling money. When buying it you get a policy, which is like a contract, where you will find what is covered and what is not. It is important to read it properly, so you can be aware of the limits of your insurance plan.

If you want a full and more detailed explanation on insurance, the different types and more, then you should visit this site.

What Do They Do With Premiums Money?

Insurance companies need to manage premium dollars in order to keep the business running and be capable of fulfilling the valid claims that fall within coverage.

Essentially, they do three things with this money:

  1. Pay claims
  2. Invest
  3. Pay expenses

The second point is the most interesting, because thanks to these investment policyholders can save money. Depending on how well they do, you will save more money or less. Fortunately, the majority of established companies now how to handle their investment portfolio and diversify them properly.

How Do You Know How Much To Pay?

It is very hard to give an answer that fits all cases. In order to determine how much you will have to pay we need to talk about the kind of insurance, and only then, we can discuss other factors.

For example, let’s suppose you want to get car insurance, then the following factors would come into play:

  1. The model of your car
  2. Where you drive
  3. If you share your car with other people
  4. If you use it for work or not
  5. If you keep financing it

The same can be said about life insurance, where many factors come into play. Therefore, your best bet is to work with an insurance agent, in order to explore the options available in the marketplace for what you need.

What Will Happen When I Fill a Claim?

A car accident? Was your house damaged due to a fire or vandalism? Then it is time to fill a claim to get the monetary compensation offered by your insurance plan.

First off, refrain from filling a claim for things you can easily afford. The more you report the more expensive your premium will become. Only do it in cases that really need it.

The process goes down like this:

  1. You fill the claim and present it to your insurer or broker
  2. A Claims Representative will contact you for further information on the incident
  3. The same representative will bring you options on how to settle your claim
  4. The representative will take care of the whole process and paperwork
  5. You will receive a payment that goes according to your insurance coverage

Those are the stages that you will have to go through from filling your claim to receiving the corresponding payment.


That is how insurance companies work. You can understand it easily, because we have not used any kind of hard terminology.

In any case, if you had a question regarding how insurance works, just post it and we will answer it as soon as time allows it.

Elliot is the Editor at ABCMoney. He manages a team that writes and contributes to many leading publications across a number of industries.

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