example of insurance (2023)

example of insurance 

1. basics of insurance

 

 what are the fundamentals of insurance? first let's try understand insurance, that what is this product? it isa beautiful product, a valuable product and if used properly then you can have adequate protection for yourself. 

basic example

this means that you give an amount to a company, which is called the insurance company, and we will come to what is that amount called, and you give this amount annually, half-yearly, quarterly, or of monthly. 

And why do you give this amount?

Because you want protection. 

Protection against something that you can't plan or predict. So, insurance has a basic formula, that (x) happens, and (x) keeps changing depending on the kind of insurance you are buying, then give me financial protection. IF (X) happens, give me financial protection.

 

For example 

 

If I am hospitalized, i get a disease because of which i have to stay in a hospital, then give me financial protection, meaning i need aid to bear the hospital's expense.

IF death happens

 

if die parson, then give my family financial protection, meaning if 

I as an earning member die, then my dependent who relied on my income, give financial protection to them.

This is the basic definition of insurance.

Now, how this insurance works, because usually the amount that you have to give for this protection, that is dramatically lower than the actual amount you are paid when it is (X). I will say that once more with an example, 

many of us must be having health insurance, I will give my example, when I started health insurance, which was about 5 years back when I was 18 years old, that time I took a cover of $ 20 thousand, for my parents and myself and my sister. I was unmarried at that time, there were just the four of us, and I took a $20-thousand cover. as far as I can remember, according to me for the $ 20 thousand cover, I used to $2,000 annually and that covered the entire family.

This means that God forbid if something happens to any one of us and we have to be hospitalized because of that, then the insurance will pay the hospital bill. but i have paid only $2,000 for that, for one year, yes it could happen after 2-3 years, but it will take many years to cover $20 thousand, right? but still, the insurance company is giving me a 20-thosund cover for just a premium of $ 2,000, how does that work?

 

To understand this, first let's understand the definitions. first, the contract that you do with your insurance company, that if (X) happens, then give me financial protection, that contract is called policy. It's called a policy. that's why we say insurance policy. The is called a policy.

There are two fundamental things 

1.premium 

In this policy. One is premium. 

Premium is that amount which you give to the insurance company. It could be monthly, quarterly, half- yearly, or annually. this is the amount you give to get the financial protection, that the insurance company promises you.

 Another important thing is cover.

2.Cover

Cover means financial protection.

TO what limit, what scale, what amount, will you get this financial protection, Is's called a cover, meaning how much covered are you so, let's talk about the same health insurance.

At the age of 22, when I took a cover of $20 thousand, meaning if, my family anybody gets hospitalized, then the insurance company will bear the hospital bill $20 thousand on my behalf, and for that, I gave s premium of $ 2000. This is how it works. 

Now the biggest question that most people have is, This is a fraud! How can you get something worth $200 thousand in $5000? This is not possible *is that sacred games reference? lol. * 

Why people don't buy insurance?

which has yet happed to you, and more often than not, you want that it should never so you are actually paying someone for something that you do not want and number 2, you are paying such a small amount for such a big cover, that it almost sounds fake. How is this possible? 

How does this work?

 so, for that it is important to understand that what is business model of insurance companies. Since I am entrepreneur so I am interested in business model, and I love to understand them, so this is how it works. Suppose, there is a town and 100 people live in it. All of those 100 people have health insurance and Let's assume the insurance is for $20-thousand for all those 100 people. and suppose these 100 people have paid 10,000 annually for that insurance of $20 thousand So, how much money does the insurance company get in year? $10,000 *100 which is $10,00,00. They have given the insurance of $20-thousand Now the insurance company has done a calculation at their end that, in one year. How many people get hospitalized in one year? Now, I don't actually know this number, but if i predict, of course I am not an insurance company, an insurance company has all the date, they collect all the data from all the hospital, medical fraternities and use it. They figure that 2% of the population gets hospitalized in a year, so 2 out of 100 people get hospitalized in year. This means, how much premium did they collect in year? 100 thousand. but at the end of the year, out of 100, on average 2 people get hospitalized, which means, what was the expense on them? 
Even if we take maximum, thouing the hospital bill doesn't need to be equal to the cover, it could be less also, but even if we take the maximum, then for 2 people having a cover of $2 thousand, which means insurance company had to pay $20 thousand to the hospital and at the end of it, that year, they made $60'protit. This is not actual profit because there are many other things as well in it but at the premium level, they made a profit, and that is how it wors. 

What they do is something called Risk pooling

Risk pooling. Insurance companies pool the risk as in group the risk. 

They try to understand that there is a group, and the characteristics or features of that group are more or less the same, which means broadly even their risk profile would be the same. for example, in health insurance if you smoke but everything else is fine, then your grouping would be with all the smokers who have everything else in order. So it is assumed that this group, which actually smokes, but has on other medical condition, will have more or less the same risk behavior, meaning the rate of their hospitalization will be more or less the same, rate of their critical illness will be more or less same, the possibility of their death will be more or less the same, and that is how the insurance company actually goes about creating common risk group and through h they decide the premium. 

This is why the premium changes according to who you are where you are. since I took insurance at age 22, which is quite young, hence I got it cheap. If today at the age of 40, I take an insurance plan with the same cover, then I will not get it at the same premium. I will have to pay more premium, why? Because the risk of me dying so young is far lesser. If take same insurance at the age of 40, then neutrally risk has changed, the risk of someone dying in the next 20 years when they are 40, is far higher as against the risk of someone dying in the next 20 years when they are 22and that insurance companies price their product and that is why your premium, the amount that you pay for covering the financial protection varies according to your age, your profile, your medical conditions, your characteristics, your features

Thet is the details it goes into buying insurance. So, this is very important to understand before we go into any analysis of an insurance product, whether you are buying life insurance, health insurance, for a home loan, education loan, insurance, vehicle insurance, for parents, for yourself, for your family, whatever the case is, it very important to understand how the insurance work does, what is a policy, what is a cover, what is premium and how is it that you can take such a big cover in such a small amount? once you have established this, then is next step for us to cover, How do you about assessing different insurance products.