Risk as an inevitable factor of life. Long ago, there was little you could do to manage it. These days, that’s no longer true. Risk can be managed through the use of insurance products. Insurance may be something that you don’t enjoy or don’t want to talk about, but it is something that is vital in planning for rainy day. As many of us have discovered the last few years, rainy days will come.
In this article, we cover the basics of insurance. Insurance comes in many different forms and there are many different policies for many different risks, so the following discussion is only a general one. There are plenty of exceptions and other issues that can be raised, so don’t be surprised if some are not. Still, the following covers the basics that apply to just about any insurance policy.
In general, insurance is all about something known as coverage. What is coverage? Coverage is simply the application of the insurance product to a particular area of risk. Car insurance, for instance, involves coverage associated with the risk of getting in an accident or having something happened to your car. Life insurance, on the other hand, provides coverage for the financial risk associated with dying. Life insurance can’t bring you back to life, but it can cover your financial obligations. With every measure of it there is always the element of coverage to be considered. This is really where insurance begins and stops.
The next element of insurance you must understand is the “policy”. Millions of people buy insurance every day. Almost none of them actually understand the policies that they are buying. The insurance policy is a contract at its heart. Pursuant to legal theories, it is considered something known as an adhesion contract. What is an adhesion contract? Is a contract that is considered one-sided. For instance, if you try to renegotiate your healthcare insurance contract, you’re not going to get very far. It tends to be a take it or leave it situation with one side having all the power to set the terms. As result, the insurance contract is interpreted against the interest of the companies when a dispute arises in court and there are any ambiguities.
The third basic element of any contract is the premium. The premium is a very simple thing. It is the price that you pay for the insurance. The amount of the premium is something that is next to impossible for most laypeople to understand. The reason being, the premium is based on actuarial charts and analysis of the risk involved in the insurance. Depending on the type, the premiums can be calculated based on everything from the nature of the coverage to your credit report. Yes, your credit report!
Regardless of the type of insurance that is being discussed, these are always the three basic elements. There will always be an element of coverage, a policy describing that coverage, and a premium paying for that policy. As long as you keep those three things in mind, you’re well on your way to understanding what you are buying and what it will do for you.
About the author