Definition: Insurance is an intangible product provided (sold) by an insurer to compensate the policy holder (the insured) when they experience a loss associated with the insured object (like a home or automobile).
What Does Insurance Mean?
What is the definition of insurance? Simply speaking, insurance is protection against the risk of loss, primarily financial loss. Insurance can be purchased to cover nearly any aspect of life, including your home, your automobile, your health, your income… the list is endless.
This service works in a rather simple way, but the coverage and rules surrounding the coverage are complex and often times difficult to comprehend. There are two key variables to insurance coverage that should be understood by policyholders, the premium and the deductible.
The premium is essentially the cost of the insurance coverage, and is often times billed by the insurance company in monthly, quarterly, or annual increments. The deductible is the minimum amount a policy holder is required to pay towards the financial loss before the company will begin to absorb the additional value of the loss.
Conceptually speaking, it’s best to think about the cost of premiums and deductibles in one way: the more risky and more valuable the potential loss, the more expensive the premium, and the higher the deductible. This is best portrayed in a simple example of how automobile insurance works.
Example
Let’s pretend you just purchased a car, and state law requires you to maintain an insurance policy covering your car (as well as any damage you may do to property or other drivers in the unfortunate event you may get into an accident). You call a local insurance agent, and he asks you for some personal information, as well as information about your car. Leveraging this information, the agent will prepare a policy for you, and the policy will define the premium amount you owe each month, as well as the deductible amount you’ll pay in the event you need to use your coverage.
For our example, let’s assume you’re a good driver, and your monthly premium amount is $100, and your deductible is $500. You will pay the $100 every month for the policy coverage period, and if all goes well you will never have to pay your deductible. If you do get into an accident, and the amount of financial loss is severe (say your $20,000 car is completely totaled and cannot be repaired), the ins. company will require you to pay the $500 deductible, and they will compensate you for the value of the car at the time of the accident. After an accident, or any other derogatory mark on your driving record, you may find that your premiums increase.
Summary Definition
Define Insurance Expense: Insurance is an intangible product provided by an company to protect a policy holder from the risk of financial loss.
