What is Insurance?
Even from a young age people need insurance and it is a subject that is loosely related to almost everything that we do, whether that is going on holiday, driving a car or buying something new, but what is insurance?
There are thousands of sites on the internet that sell insurance but not many of them actually provide you with an insurance definition.
Just because insurance is such a huge industry and a necessity in the every day lives of almost every person it is just assumed that knowledge of car insurance or life insurance, to name but a few types of insurance policies, and what they entail comes naturally to us all.
This is not often the case though and many consumers will use the internet to find out the meaning of insurance before they attempt to buy a policy for themselves. This page is going to talk about what insurance is and provide a simple definition of insurance for those of you that want to actually understand the subject before parting with your money.
You have heard the common saying ‘there are only two certainties in life and these are death and taxes’, well you can add insurance to those as it is guaranteed that at some point in your life you are going to require some sort of insurance policy, in fact it is more than likely that you will require several types of insurance. This is of course unless you are going to spend your entire life on an island in the South Pacific, however if that was the case then you wouldn’t be on the internet reading this!
What can you insure?
Insurance is something that falls into general categories such as life insurance, car insurance, health insurance, business insurance and so on but there are also many niche types of insurance as well such as for photographers or marine insurance. For more information on the types of insurance policies available to consumers please see our main page. You will find that the general types of insurance will come up as necessities in life and they are covered in more detail on our other pages. However, it is possible to take out insurance on almost anything in the modern day market, the following examples prove just that:
The NFL player Troy Polamalu was insured against the damage or loss of his iconic hair for $1,000,000 over the course of a single season in 2010 by a sponsor.
Music legend Bruce ‘The Boss’ Springsteen has his voice insured for $6,000,000.
Pop star beauty Rhianna has her legs insured for $1,000,000(I know only $1,000,000?!)
England soccer ace David Beckham has his legs insured for $70,000,000!
So we know that insurance is something that can cover your life, your health, your car and even your hair if necessary but what is insurance itself, what does it actually mean to be insured? We will now proceed to talk about the meaning of insurance.
What is insurance?
In simple terms insurance is what is needed to cover a risk, a safety net against the possibility of some kind of loss that will ensure that we are not left short in the event of one of these losses occurring. We face risks everyday in life, whether that is the possibility that today could be our last day on earth before we die, that our car may stop working, or even that we somehow lose or damage an item of our property. All of these possible occurrences could happen at any time and therefore are deemed as an ongoing risk, the meaning of insurance is to have something in place to negate those risks. Some insurance policies assume the whole risk, some most of the risk.
By not having insurance you are accepting that these uncertain risks could happen at any time and if they do that you are going to have to face the consequences financially yourself, for example if your car is damaged in an accident then you will pay to get it fixed. The meaning of having insurance in this scenario is that you would not have to pay these costs because you previously taken the risk of this happening into consideration and have a car insurance policy in place, this was risk management as you transferred the risk from your own pocket to the insurance policy.
If you like insurance is like hedging your bets, you know that something may happen that is going to cost you money and put you at a loss, insurance is what allows you to make sure that if that something does happen then it is not going to cost you as much as you had anticipated, it is going to cost you something for this assurance but nowhere near as much as the loss you would be faced with if you did not take the insurance out to cover your bases. It is as simple as that, the meaning of insurance is to ensure that all of your bases are covered for a small cost. The cost of course is still seen as a loss because you are paying this out for something that may well never actually happen, however when you consider the amount of money that this small cost would save you if it did then it is obvious just how cost effective and important insurance is.
Insurance is a transaction between the person who is being insured and the insurance company(commonly referred to as the insurer), this transaction takes place with the person insured agreeing sharing the risk of a loss with the insurance company. The insurance company make a contract(commonly referred to as the policy) that guarantees to compensate the person insured for a certain amount of money in the event of certain risks taking place, this is negating the loss to the insured person. The contract states in black and white all of the terms and conditions of the insurance, so basically under what circumstances they are liable to pay out. The contract will remain good as long as the insurance premiums are being kept up to date by the policy holder.
Of course insurance costs money and is never free, but the price that you pay to have any of the many types of insurance in place is significantly less than the costs that you would be liable for should the risks that the insurance negates actually happen.
Here are some examples in very basic terms of what insurance is:
Example 1 of what insurance is
Mr Suarez has a wife and two children and is paying off a mortgage and other loans, he wants to take insurance out to make sure all of these debts are paid off if he were to fall seriously ill and not be able to work or die. He takes works out the total of all of these debts are $200,000 so he takes out an insurance policy that will pay this amount out if he were to die or to become seriously ill in the next 30 years, the time that he has projected he needs to pay these debts off.
The risks are:
Firstly, if he stops working because of illness he will still be liable to pay his debts and mortgage and this could mean losing his house or his family being forced to pay the money he owes.
Secondly, if he dies he will not longer be able to work to pay off the debts and mortgage and his surviving family could lose their home and still be liable to pay the other debts.
If Mr Suarez pays a monthly life insurance premium of $20 then these risks are transferred to the policy and he is safe in the knowledge that he and his family will be financially protected against these risks. If he chooses not to take out insurance then he is going to be financially vulnerable, as will his family as he is taking financial responsibility himself for these risks. Over 30 years he would only amass $7,200 by saving those premiums, yet he would be covered for $200,000 with the policy, this is why insurance is such good value for money. A smart Mr Suarez understands the meaning of insurance and it’s importance and protects his family with the insurance policy. Read: How Much is Car Insurance for 18 Years Old
Example 2 of what insurance is
Mr Reina decides to take out a health insurance plan to cover the costs of things like going to see the doctor and having his eyes tested, he pays a monthly premium of $25 which guarantees that the insurance company will compensate him for the costs that he incurs for several health related matters, including the ones we have just mentioned. All he has to pay is a small annual deductible when he first uses the policy to cover a specific aspect of the insurance, for example if he wants to see an optician he will pay the first $10 of costs each year and the insurance policy will cover the rest.
The risks are:
Your health can change at any time, if Mr Reina needs to see a doctor, go to a hospital for tests or x-rays, get his eyes tested or any one of a number of other health related risks he is liable to pay all of the costs that these incur. It may be that in a year he is as fit as a fiddle and does not have any health issues at all, in which case he may see the health insurance as a waist of money. However, he could be involved in a car accident that was the fault of another careless driver, he may work with computers and one day the glare of the screen damage his eyes so that he needs them tested regularly. In these cases he would incur medical costs that could be very expensive.
Health insurance is what ensures that these risks are shared, by paying $25 a month he could save hundreds or even thousands of dollars in a year if he were to require some sort of health related treatment as he would pay the small deductible and the rest be picked up by the insurance company. Just seeing an optician three times a year at a cost of $75 a session is $225, the $10 deductible means he has saved $215 just on that aspect of the policy.
For more information on health insurance please visit our health insurance for individuals page.
If you were to look up an insurance definition in the dictionary or elsewhere on the internet you would of course be told the same thing as you have been on this page, however many of these will be all jazzed up with long complicated wording or industry jargon which is not what the average consumer wants when they are searching for a simple insurance definition. As on all of the pages on our website we have tried to make everything as straight forward and understandable for you as possible. Here are a few of these insurance definitions for your information:
Insurance is a form of risk management that is primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of loss, from one entity(you the consumer) to another(the insurance company), in exchange for payment(the insurance premium). The transaction that takes place between these two entities will involved the insured(the customer) assuming a guaranteed and known relatively small loss in the form of payment to the insurer(the insurance company) in exchange for the insurer’s promise to compensate or indemnify the insured in the case of a financial(personal) loss. A contract is drawn up which is referred to as the ‘policy’ and this contract details the terms, conditions and circumstances under which the insured will be financially compensated and for how much.
A simple definition of insurance is: The promise of compensation for stipulated pre-determined occurrences in exchange for a regular or one off payment in order to offset the risk of unexpected financial loss.
A very simple example of the definition of insurance is as follows:
Mr Agger wants to insure his own life for $100,000 so if he dies his family will be able to pay off their mortgage and have money to look after themselves for the immediate future. He will pay an insurance company a regular monthly premium for a life insurance policy that guarantees to pay out this amount if he dies within the twenty five year term that the policy has agreed to be in force for. Mr Agger’s death would be untimely and unexpected if it happened in the next twenty five years so he is just covering his back with this policy. The policy will run for the twenty five years as stated and the contract will be binding as long as he keeps up to date with his monthly premium payments. If he does not die in the term then the money will not be paid out but of course he will still be alive to work and take care of his family so it would not be required.
We hope that our page explaining what insurance is has been of use to you and that you have been able to identify how insurance works with our insurance definition. The meaning of insurance is of course to protect yourself and there really are a great many different types of insurance policy available in the market place today. Please visit our other pages all about the different types of insurance on offer where we explain these in simple jargon-free language.