What Is Insurance

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. (For background reading, see The History Of Insurance In America.)

Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. We say "significant" because if the potential loss is small, then it doesn't make sense to pay a premium to protect against the loss. After all, you would not pay a monthly premium to protect against a $50 loss because this would not be considered a financial hardship for most.

Insurance is appropriate when you want to protect against a significant monetary loss. Take life insurance as an example. If you are the primary breadwinner in your home, the loss of income that your family would experience as a result of our premature death is considered a significant loss and hardship that you should protect them against. It would be very difficult for your family to replace your income, so the monthly premiums ensure that if you die, your income will be replaced by the insured amount. The same principle applies to many other forms of insurance. If the potential loss will have a detrimental effect on the person or entity, insurance makes sense. (For more insight, see 15 Insurance Policies You Don't Need.)

Everyone that wants to protect themselves or someone else against financial hardship should consider insurance. This may include:

    Protecting family after one's death from loss of income
    Ensuring debt repayment after death
    Covering contingent liabilities
    Protecting against the death of a key employee or person in your business
    Buying out a partner or co-shareholder after his or her death
    Protecting your business from business interruption and loss of income
    Protecting yourself against unforeseeable health expenses
    Protecting your home against theft, fire, flood and other hazards
    Protecting yourself against lawsuits
    Protecting yourself in the event of disability
    Protecting your car against theft or losses incurred because of accidents
    And many more


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