How insurance works have been a confusing topic for a long time now. A simple internet search would give you results about how it works but we are here to explain it in it’s simplest term. According to ABI, it is a financial product sold by insurance companies to protect you or your property against the risk of loss, damage or theft. The other way round it can also be referred to as a system by which a company undertakes to provide a guarantee of compensation for specified loss, death or damage to an individual to which the individual in return makes a payment for a premium.
The term Insurance is divided into two
- Property and Casualty insurance
- Life and Health insurance
The property and casualty section deals with the protection of business, properties or assets. Life and Health insurance covers financial break down due to sickness or premature death.
How Insurance work
The question now is how does Insurance work? Let’s explain this in it’s simplest form.
This process starts when you purchase a policy that requires you to make consistent payments, this is simply known as premiums. directed to the insurer. Your insurer pays you when you make a claim that is being documented in the policy. Now if you don’t make any claim no money will be paid to you rather it is pooled with the premiums of other policyholders who have taken out insurance with the same insurance company. But when a claim is made the money will also come from the pool of policyholders’ premiums.
Read: How to buy or get homeowners insurance
Before you step into Insurance and know the type of insurance you need to make sure you read the below information;
- You would want to know why you need a cover
- What you want in your cover
- Number of time you would need the cover
- Amount of money you can spend on it
