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How Insurance Works

Insurance provides individuals and companies protection against large financial losses due to damage or loss of property. In exchange for premium payments made, individuals and companies are guaranteed to get compensation or reimbursement in the conditions stated in the insurance policy. Insurance has become a part of the life of modern society. Life insurance and car insurance are the two most common forms of insurance. Health insurance and compensation for workers are also other common types of insurance. While insurance has become a part of most people's lives, not all understand how it works.

How Insurance Works?
There are always risks in life such as fire, theft or earthquake. Many people hope to avoid financial losses by getting compensation for lost or damaged personal property. Insurance is a way to protect personal finances from undue burdens. Insurance is a form of risk management where risk is transferred to insurance companies in exchange for premium payments. When buying insurance, someone gets an insurance policy which is a legally binding contract. This policy explains in detail all the rights, responsibilities and obligations of the insured (customer) and the insurance company. When someone suffers a loss that is covered by the policy, he can file a claim. A claim is a complete report of what is lost or damaged and its value.



The amount of money to be replaced (the sum insured) is based on the amount contained in the policy. When an individual or company buys an insurance policy, all the money from the premium is then combined into what is called an insurance pool. Insurance companies use statistics to predict what percentage of insured people or businesses will actually suffer losses and file claims. Statistics also help determine the amount of the premium. Other factors such as credit scores and previous claims are also considered. Because most insured people do not suffer losses or only suffer small losses, insurance companies get benefits that allow them to continue to operate and pay large claims once in a while.

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