Buying Insurance

Lesson 1: The Basics

This first lesson discusses the basic principle underlying all insurance. It summarizes how insurance companies are rated and what the rating means. It reviews the terms "property" and "casualty" (insurance jargon:P&C) as they relate to your insurance. It summarizes the principle of "coinsurance" and explains how that principle can have a radical impact at the time of a claim. Finally, it discusses the differences between the large nationally advertised insurance company agencies and locally owned insurance agencies and the pros and cons of each.

How It Works

The basic principle underlying all insurance is "shared risk". Simply put, a large number of people pay a small amount of money each to share the calculated risk of suffering a large financial loss through no fault of their own. As an example, you might pay $300 to insure a piece of property worth $100,000. If the property is totally destroyed, say by fire, the insurance company would pay the $100,000. The idea is that most of us can afford the comparatively small amount of money (insurance jargon:premium) to pay for the insurance policy but could not afford the full loss, or even the partial loss, of the destroyed or damaged property. Obviously, not all insured property is going to be damaged or destroyed in any given year, or perhaps ever. That is the "risk" part of the equation and is determined by professionals called actuaries as the insurance companies determine how much each insured must pay as his or her "share" for the insurance.

The terms "property" and "casualty" (insurance jargon:P&C) are for the most part fairly obvious. Property means real property and physical property, that is things, like houses, cars, buildings, and so forth. It is the "stuff" side of insurance. Casualty refers to people and the injuries they may sustain. The casualty part of insurance is also called Liability because someone other than yourself (insurance jargon:third party) may be injured through some act or fault of yours and you may thus be legally liable for those injuries. For more on the basic approach to insurance see Hungelmann, pp.12-15.

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