What’s The Essence Of Insurance – My Simple Explanation

Saturday, March 23, 2013, 1:00 AM | 12 Comments

The other day, my 20-year old son asked me what insurance premium was. Here is my simple explanation. I dedicate this post to the newest of the new folks who have little or no knowledge of what insurance premium is and how the insurance policy works.

Let’s understand the essence of insurance. What’s involved in it and why should we have it? We will discuss the various topics in insurance such as premium for insurance, financing insurance, what you can do to reduce the premium rate, and so on.

Points for discussion…


Auto Insurance

  • we’ll discuss auto insurance because that’s what the young are mostly concerned about.

  • And therefore, we’ll discuss only personal insurance and not commercial. The only entity we discuss here is yours.

  • We’ll give very brief description – the essence – of auto insurance, enough that you can talk to an insurance agent more intelligently.

Let’s begin at the beginning. What’s Insurance?

Insurance of any kind and of anything is a hedge against natural or man-made calamity. It’s your financial security. It’s your peace of mind.

With insurance you basically manage the risk of losing life and property. You can recover the value of some or all of your belongings except life of course, depending on what kind of insurance you have and against what disaster.

You, then, exchange a small loss – monthly premium payment – on your part from your pocket now with recovering a bigger loss later.

So without insurance, in case of an accident, you lose everything and you have to replace it with money from your pocket fully.

With insurance, after paying your deductibles, the insurance pays the rest – almost all – to replace your loss completely.

Some terms floating around in the industry:

  • An insurer is a company selling the insurance.
  • An insured or policyholder is the person buying the insurance.
  • The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the insurance premium.

Why would you buy insurance?

You don’t have to buy insurance for anything you own. But if the “roof on your head comes down on you” and you are left with nothing or almost nothing, you wish you had some insurance against whatever calamity – natural or man-made – came upon you.

Behind the Wheel

However, in cases where your state requires you to buy the bare minimum insurance to protect not just you as its citizen but more than that to protect others especially in the case of auto-insurance, then you have no choice except to buy it.

How then do you buy insurance?

There are companies – lots of them, more than you can digest – that would sell you insurance.

You pay them every so often, most probably on a regular and periodic basis, and they would give you insurance.

The payment you make is generally known as insurance premium.

In other words, the premium is the amount of money charged by insurance companies for active coverage.

You can pay lump sum amount or in installment and is mutually agreed upon between you and your insurance company during the duration of the policy.

If you fail to pay the required premium by the due date, it so happens that your policy will be canceled. However, you can restore the policy when you make payment of the outstanding amount within a certain period.


Premiums vary depending on:

  • The amount and type of coverage purchased
  • The make and model of the car
  • The insured’s driving record, years of driving and the number of miles the car is driven per year
  • Other factors taken into account include the driver’s age and gender
  • Where the car is most likely to be driven and the times of day – rush hour in an urban neighborhood or leisure-time driving in rural areas
  • Some insurance companies may also use credit history-related information.
  • And the premiums vary from company to company as well.

How do you reduce the premium for the same policy?

Laura T. Coffey over at MSNBC has an excellent article How to reduce your auto insurance premiums. The advice in the article is still as useful today as when it was written on July 25, 2007.

How do you select a company for your insurance needs?

Believe it or not, an insurance company works like a loan company. It allows you to make payments over a mutually agreed upon period of time. It reduces the risk of going without coverage and manage your budget. But how do you select a company to that effect?

  • Type of insurance coverage

    Verify that the company handles your personal insurance coverage needs.

  • Rates

    Shop around for the best rates before you make the final decision of buying the policy.

  • Company’s reputation

    Always make sure you are dealing with a reputable company by checking with the Better Business Bureau and other such consumer information sources in your state.

    Go to your town’s library and read about insurance in Consumer Reports and other magazines. Avoid companies that solicit by phone or have excessive complaints on file.

    Both types are red flags of potential frauds or predatory practices and believe me there are many.

In a Nutshell
Many folks are willing to pay a small amount for protection against certain risks because that protection provides valuable peace of mind.

Prices for premium vary from company to company, as with any product or service so you are advised to shop around.

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  1. 12 Responses to “What’s The Essence Of Insurance – My Simple Explanation”

  2. By Jose on Mar 27, 2013, 7:32 pm | Reply

    The irony of insurance is that at it’s most basic, your placing a bet against yourself, e.g. that something bad will happen. I guess that’s a pretty negative view for something that is absolutely necessary in todays world.

  3. By Shafi on Mar 28, 2013, 8:57 am | Reply

    The young must have insurance as anybody else. But they seem to be careless about getting it. At the most part, they don’t seem to understand the very basics of insurance. And yes! You have to get insurance not only for yourself but for bodily injury in the other car.

    That’s what insurance means – insurance against loss due to theft or traffic accidents. Nobody can predict any of these events against which you take out insurance.

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