7 Smart Concepts to Understand About How Insurance Works


Insurance is one of the foundations of modern life. Most people have some form of insurance. Understanding how insurance works makes it easier to understand what kind of insurance is a good idea for each person’s individual circumstances.

1- Different Types of Insurance

There are many different types of insurance. Health insurance is designed to pay the person’s bills in the event of a sudden emergency or ongoing, chronic health problem. Life insurance is designed to protect a person’s spouse and children if something should happen to the breadwinner. Other types of insurance include car insurance, travel insurance and flood insurance.

2- Reduction of Risk

All types of insurance work on the same principle. The goal is to reduce risk. Risk is an ongoing problem. A person may get into a car crash. In that case, their car may be heavily damaged. They or their passengers may suffer from unexpected injuries. They may have injured someone else or harmed the other person’s car. Insurance is designed to protect everything and everyone from the driver to the passengers.

3- Sharing Costs

Using insurance means spreading the costs between all parties to the insurance program. For example, those who are relatively young and healthy may still choose or be required to carry health insurance. Younger people face less risk of health problems. At the same time, older people may face all sorts of medical issues such as diabetes that are more common as people age. The use of insurance spreads these costs out. Younger people benefit because they are protected in the event of any health problems of their own. Older people benefit because they can pay less and still get access to the health care they need.

4- Filing Claims

In order to get the benefits of insurance, it is usually necessary to file a claim. A claim is a specific plan that must be followed. For example, someone who is involved in an automobile accident will usually be required to fill out a claim form from their insurance company. This document sets in motion a series of actions including the investigation of the claim and the desired result such as payment for any kind of damages or replacement of the car’s parts. Filers need to make sure all claim forms are filled out accurately.

5- Paying Premiums

Premiums are the amount of money that people pay in order to get the insurance. A premium may be paid in certain ways. The premium may be paid all at once, quarterly, monthly or as part of the employee’s paychecks. Many employers provide their employees with certain kinds of insurance as part of their work benefits. They may provide the employee and the employee’s family health insurance. Many companies also offer their employees life insurance in the form of a single year’s salary if they pass away. It’s best to know in advance how much of a premium needs to be paid as well as any financial benefits offered from the insurance.

6- Tax Implications

Certain forms of insurance carry tax implications. For example, people who receive life insurance will not owe tax on the money received. This is because they have paid for the benefit in advance. Under certain circumstances, the money may be taxed or someone else may have a legal claim on the funds. For example, if a lawyer fought to help get access to life insurance, the lawyer may have agreed to work for free and then share in the life insurance funds once the case is won.

7- Using Insurance Wisely

Taking advantage of insurance is a good idea. When someone is just entering the workforce and has children, it’s a good idea to have at least some form of life insurance. The insurance policy protects their children and makes up income in the event the earner passes away. As the breadwinner ages, their children grow up and their savings off increase. In that case, it may be a good idea to let the premiums lapse as the holder of the policy has enough money to provide for their dependents. Careful use of insurance is part of any thoughtful financial planning.


About Author

Kelly is DailyU’s lead blogger. She writes on a variety of topics and does not limit her creativity. Her passion in life is to write informative articles to help people in various life stages.

Leave A Reply