How an Insurance Policy Works

Insurance is synonymous with a large number of individuals who share the risk of losses expected from an alleged accident. Here, all the insurers will bear the cost of the losses. You can learn more at  – Miller Hanover Insurance

If, for instance, Mr. Adam buys a new car and wants to protect the vehicle against any incidents that are expected. By paying a certain sum of money, called a premium, to the insurance provider, an insurance policy would be obtained from an insurance company by an insurance agent or insurance broker.

The insurer (i.e. the insurance company) issues him an insurance policy, or contract file, the moment Mr. Adam pays the premium. The insurer analyzes in this policy how it will pay for all or part of the damages/losses that could arise in the car of Mr. Adam.

However, just like Mr. Adam will buy an insurance policy and pay his insurer, a lot of thousands of other people do the same thing as well. All of these persons that are covered by the company is referred to as insured. Normally, most of these persons will never have any kind of incidents, so the insurer will not need to give them any sort of compensation.

If Mr. Adam and a few other individuals have accidents/losses of any way, the insurer will pay them on the basis of their policy.

It should be remembered that the overall premiums paid by these thousands of insured persons are so much higher than the compensation earned by a few insured persons for the damages/losses. Therefore, the insurer uses the immense left-over money (from the premiums received after paying compensation) as follows:

  1. Some are kept as a reservoir for cash.
  2. For more gains, some are used as investments.
  3. Some are used in the form of rent, equipment, wages, staff welfare, etc., as operating expenses.
  4. Some are loaned out as fixed deposits to banks for more interest, etc., etc.

He may also opt to insure himself, in addition to the car insurance taken from Mr. Adam on his new vehicle. Since it concerns a human life, this one is highly different and is also called Life Insurance or Guarantee.

Life insurance (or assurance) is insurance against certainty or something that is likely to occur, such as death, rather than something that may occur, such as property loss or injury.