Insurance is a risk pool. What’s that, you ask? It’s something that’s formed to reduce losses in the case of some huge, catastrophic occurrence. For example, insurance companies in Florida, where hurricanes are fairly common, may form a risk pool with Midwestern insurance companies, where you find seasonal tornadoes. The companies share the risk and the expense when claims are filed after a bad storm in one place or the other. Being a risk pool, an insurance company accepts risks. Accepting risks, however, isn’t the same as taking risks. The risks involved in the insurance business are closely tied to the chance that a loss will occur. The loss is based on a monetary amount for the property, health, life, or some other entity that has value. And basic to this chance of loss is determining the probability that a loss will occur
Surveying the Types of Insurance Available
Insurance comes in many different varieties, but the common theme of all of them is the quest to reduce loss if something catastrophic happens. You really hope that you’ll never need the insurance; but you have the insurance just in case you have to cover the expense of replacing what’s lost. Also common to the different types of insurance are the various computations necessary. Many of the mathematical procedures work much the same for the different types of insurance.
Insuring with a group
For example, a company can offer life insurance to its employees as a fringe benefit. The total amount of insurance provided to an individual is usually tied to earning level or longevity, and companies often offer options for employees to increase the amount of coverage if they want to. The insurance rate or cost is determined by the ages or conditions of the people being covered, and, because many people are involved, the risk is spread out to make the cost less than if the policies were purchased individually. The policies may also have a provision that decreases the amount of life insurance to be paid out after an employee reaches the age of 65 or 70
Protecting your business with endowment insurance
Life insurance is designed to replace the income or wages of a person who has dependents, partners, or a business. The insurance doesn’t replace the person and what he or she has to offer in physical production or guidance, but the monetary relief helps the family or business continue financially.
Protecting Yourself from Loss by Insuring Your Property
Owning property brings with it a lot of possibilities: pleasure, extra income, security, and, of course, risk. Many folks tend to focus on the risk because all pieces of property are at the mercy of the actions (or inactions) of nature and people. But luckily, insuring your property passes the risk of loss to another entity: the insurance companies. The insurance companies determine the risk of loss in your particular situation. Then they factor in the cost of operating expenses, add in some profit, and set an amount that you pay them for taking the risk.
Different types of buildings have different rates of insurance. These rates are all based on what the buildings are constructed of, where they’re located, and what type of work takes place in them (storage or manufacturing, for example). Some buildings are constructed of brick and stone and others mainly of wood. Some are on the sea coast and others are in tornado-prone areas. Some buildings house families, others house retail enterprises, and yet others contain manufacturing activities. Actuaries, which I explain earlier in this chapter, weigh all of these factors and determine the risk for specific buildings.
However, rest assured that if you aren’t in the position to pay the total amount all at once, you can opt for three installments instead. Before committing to one payment plan or another, you want to determine how much more it will cost you to pay in several installments than to pay all at once, at the beginning. The following example shows you what I mean.