Understanding How Insurance Works to Provide Protection

Insurance is something that almost everyone has, but not everyone fully understands how it works. Insurance is designed to provide you with protection in uncertain times. However, most of us do not understand why insurance companies are able to provide benefits. Here are a few things to help you understand how insurance works to provide protection for you and your family.

Probabilities

Insurance coverage is all about statistics and probability. Insurance companies are constantly crunching numbers and calculating probabilities. They use employees called actuaries that help them determine the likelihood that a certain event will occur. By using statistics, they can get a good idea of how much money they will need to pay out benefits and still make a profit. They base everything off of these probabilities and it affects many aspects of your insurance policy.

The use of Classes

One way that insurance companies are able to accurately predict what will happen, is through the use of grouping people into classes. For example, their detailed statistics can predict how many car accidents an 18 year old male will be in. By compiling statistics of every car wreck over a certain period of time, they can come up with the likelihood that they will total their car. A male in the 18-24 age groups is three times more likely to total their car in a crash than someone who is 25 or over. Combined with that information, they also know that if that 18 year old male takes a driver’s education class, the likelihood of them crashing decreases. Therefore, they will increase premiums for males aged 18-24 and offer discounts for those that take driver’s education classes.

For health insurance, they also can accurately predict the amount of health care that a class of individuals will need. Therefore, if you are 55 and a smoker, your health insurance will be much higher than a 20 year old that does not smoke. They calculate all of these odds and adjust premiums accordingly.

Premiums

All of this information is taken into consideration when an insurance company quotes you a premium. Using this statistical analysis, they can determine exactly how much they need to cover the benefits, overhead, and profit. If they know that for every 1000 people they sign up for car insurance, 20 of them will total their cars within the first year, they will charge everyone enough to cover those losses. While the numbers seldom play out exactly like predicted, they are amazingly accurate most of the time. If your premium goes up, it is likely a correction in the statistics for your particular class. Therefore, you should not always take it personally.

Protection

Insurance companies are able to protect you and your family when you need help. If you are in a car wreck, you know they will be there to help you with medical bills and to purchase a new car. If your house burns down, they will help you pay to rebuild your home. Thanks to insurance, we can live a much more worry-free life.

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