How does Insurance work?

Insurance is a financial tool that is sold by various insurance companies to protect you and/or your assets against the risk of damage, loss, or theft. It works by taking a risk from an individual and spreading it across a community. Insurance companies collect premiums from many individuals, invest it in various high-interest yielding financial assets, thus, making profits even if they pay more claims than the number of premiums they receive. 

First, the insured and the insurer enter into a contract for insurance, through the Insurance Policy, which lays down various terms and conditions. The insurance company bears the risk that originally was to be borne by the insured for a price called premium. If the insured suffers a loss due to any event covered by the policy, he can claim it from the insurer up to the policy limit.

The company uses probability and risk factors to determine the premium. It is determined such that the company has enough money to satisfy claims and to make reasonable profits, but not too high so that it doesn’t discourage clients. It can provide high compensation for small premiums because only a few policies materialise into claims.

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