Definition of Insurance

Definition of Insurance

While we’ve discussed topics of insurance, like automotive insurance  and homeowners insurance, you may have been wondering all this time: what exactly is insurance? Don’t feel foolish asking this question; a lot of confusion comes up between consumers and insurers because of how each party interprets what insurance is and what the purpose of it actually is for.

In this article, we’ll be taking a look at insurance 101 to enhance our understanding and provide coverage for our family and our possessions.

What is Insurance?

The definition of insurance is: “a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium. “ [Source: Investopedia.com] Basically, insurance permits individuals, businesses, and other entities to shield themselves against potential loss and financial hardship at affordable rates.

Why is Insurance Important?

Insurance is appropriate when you want to protect against a significant monetary loss. If the potential loss will have a detrimental effect on the person or entity, insurance makes sense. However, if the value of the item you wish to insure is cheap or insignificant, insurance may be a waste and needlessly expensive.

As an example, let’s look at life insurance:

If you are the primary breadwinner of your household, the loss of income that your premature death may cause upon your family would be considered a significant hardship that can be safeguarded with proper financial measures. Because of your sole income, it would be difficult for your family to replace to maintain their standard of living. By paying your monthly premiums, your family is entitled to the insured amount upon your death.

Similarly, the same principle can be applied to most forms of insurance. Generally speaking, the risks people may face fall into a few categories:

Personal risk
When a person loses their health or life, a financial loss usually occurs afterwards.

Property risk
When others’ property is destroyed or damaged, the person held responsible will incur a financial loss.

Liability risk
When a person(s)’s actions result in damage or injury to others, they are legally held financially responsible.

A wide variety of things can be insured in a number of ways, with coverage being mandated by a state like auto insurance, pet health insurance  for an accident-prone pooch, theft of your possessions in a foreign country, or a homeowners policy that protects against slander and libel. The list is really limitless and only limited to what you don’t find impacting your life in any significant way.
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Insurance policies are purchased directly from a company or from an insurance agent of a company. However, if you’re looking to make the best decision, we recommend that you speak to the insurance advisors at RiskBlock  to ensure you and your family are adequately in the case of life’s mishaps.