Unit 8: InsuranceSection 14.1 – Insurance Basics

Section 14.1- Insurance Basics

•Goals:▫Describe how insurance works to protect

consumers.▫Explain the basic kinds of insurance and

how to determine the amount to buy.

Understanding Insurance•Risk- the chance of financial loss resulting

from damage, illness, injury or death.•Risk management means limiting possible

financial losses to amounts you can handle.•To manage this risk, you can buy insurance.•Insurance- a risk management tool that

limits financial loss due to illness, injury or damage in exchange for a premium.

•Premium- regular payments required to purchase insurance.

How insurance works

• Step 1: You buy insurance, you sign a legal contract called a policy.

• Step 2: The policy spells out the specific loss that it covers and the financial compensation the company will provide if you suffer that loss.

• Step 3: If you do have a loss covered by the policy, you file a claim, which is a formal request for payment from the insurance company.

Shared Risk

•All policyholders share the cost of losses. This is the concept of shared risk.▫Insurance companies sells policies to

thousands of people.

▫Each policy holder pays a premium.

▫Insurance companies use the large pool of money to pay out claims to the comparatively few who suffer losses.

How do they know what to charge for premiums?•Insurance companies use statistics from

past events to predict how many losses are likely to occur within any large group of people.

•They use this knowledge to set premiums.

•By charging a more than the expected losses, they earn a profit.

What Insurance Protects?

•To insure something you must have an insurable interest in the item. That means, it must be something of value that, if lost, would cause you financial harm.

•To determine value of property, you or the insurance company can have it appraised. An appraisal is an expert’s determination of the value of a piece of property.

Three types of insurance1. Property Insurance: insurance that

protects you form financial loss when things are stolen, damaged or destroyed.

2. Liability Insurance : protects you from losses that you cause others.

3. Personal insurance : insurance that protects you, your spouse, and your children against loss due to illness, disability or death. Two common forms of personal insurance

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