Insurance companies are playing an important role to manage the risk of individuals. They allow people to share their liability by pooling the individual risk and help them reduce the chances of facing the financial devastation. Due to the number of risks a person faces every day, insurance companies have evolved over the years to cater the needs of average human beings and have designed different policies and products that covers almost all the risks.
Some fundamentals about the role of insurance companies:
Insurance companies usually provide financial coverage of the loss that an individual is expected to suffer due to unforeseen events, and hence reduces the impact of a certain event. These companies reimburse the financial cost of a particular event against the premium they collect from people who purchases the policy from them. The amount of the premium is dependent upon the probability of the happening of an event, its financial damage and the individuals whose risk can be pooled. For instance, if 500 geographically dispersed individuals take out the earthquake insurance on houses that are worth, $ 200,000 approximately, and the possibility of severe earthquake is once in every 50 years, then the cost of insurance will relatively be cheap. But the case is opposite if a large number of people in the insurance pool are likely to be affected by the earthquakes after every two years. The insurance premium is higher due to frequent payments insurance companies have to do in these cases.
Moreover, insurance companies also provide life insurance policies to compensate for the burial cost, to replace lost income for the family and to pay off debts. These companies can easily determine the average mortality rate by using a large pool of insured people. People who live longer than an average age effectively fund the payment for those who die before the average mortality age. Therefore, insurance companies help reduce the risk faced by the families due of the uncertainty of death and secure the family members of the deceased.
Other than life insurance, insurance companies also provide health insurance to reduce the cost of illness by pooling the risk of illness. The cost of health care is easily balanced in the pool because some people go through life without catching a cold while others have to spend hundreds of thousands of dollars to get the treatment. Pooling the risk with other people is a wise decision because no one knows what their health will be, and how much they will have to spend to get the treatment. Always consult Your Personal Financial Mentor before selecting an insurance plan because he can guide you which policies are suitable for you keeping in the financial aspects of the insurance plans.
Car insurance is rarely utilized as compared to life and health insurance. It is provided by the insurance companies to share the financial risk of the accidents and to reduce the burden of damage that is faced by an individual. The probability of the occurrence of accidents and the related cost can be determined by using the actuarial table. This analysis is applied to the entire pool of car insurance plan and the total cost is equally distributed among the individuals.
With the passage of time, a decline has been observed in pensions. But insurance companies have stepped up to offer a plan that makes it possible for people to lead a financially stable life during retirement. To offer a guaranteed stream of income, insurance companies provide annuities. They work on the basis of your mortality rate and the return they can generate from the money you pay in exchange for the guaranteed stream of income. Annuity payments are usually higher than what an individual expected because some members of the pool die early which gives benefit to those who live longer than the average life.