How does an Insurance Policy Work?

An insurance policy is a financial product that can be availed from insurance companies that are designed to compensate for any loss that an individual may face, be it loss of life or destruction of property caused by robbery or any natural disaster. An insurance policy gives a protection to individuals and is like a safeguard.

Though it is not that you should buy each and every insurance policy out there, you should buy those which protect you and your belongings, such as health, home and retirement, among others.

The working of an insurance policy

Buying an insurance policy means you have to pay a premium, which are payments at regular intervals to the insurance company. When you pay the premium regularly, if you face a sudden loss, the insurance company will compensate for your loss. Also, if you don’t claim, you may not get your money back but this amount is added to the amount collected from other policyholders. It is from this pool that the insurance company pays for a claim.

The premium is calculated by a special procedure. The insurance companies use a data called as risk data to calculate how likely it would be for the event that you are insuring against to occur. Then, they calculate the premium as per the data received. If the likelihood of the event is higher, so will the cost of your premium go up. For example, the older you are, the higher will be the premium that you will have to pay for a health insurance claim.

Every insurance policy comes with its own standard conditions but there are some that are common to all.  One is the cover that is given to the damaged property or for the value of the property. Similar risks are what are calculated like destruction by fire, or by any natural calamity or by accidents. This gives the insurance companies the means to calculate the amount for the claim when an insured makes it. The third condition is that the losses must not be intentionally caused. If you have caused an accident by drunk driving and if it is proved to be so, you will not get any claim.

Insurance companies are regulated by the government and they need licence and approvals.  No insurance company can operate illegally.

Other points to know

When you plan to buy insurance, think what you need to cover and how much premium can you afford to pay and think about the period you will need the cover for.

Buying the insurance is relatively easy as you can either contact the company directly or go via the insurance brokers authorised by respective companies. There are also financial advisors who can guide you about buying the best ones. There are also websites where you can go and compare the premiums and other conditions of different insurance companies, so that you can choose what will benefit you the most.