Introduction
Whether it's fire protection for your home, life insurance for your family or automobile insurance for your car, everyone deals with insurance companies at some point in their life. Insurance companies offer safeguards in case something bad happens. Although you hope to never use them, insurance companies are a necessary monthly cost to protect yourself, your family and your assets.
Premiums
Insurance companies work using premiums. Premiums are periodic payments that you make to continue your insurance coverage. Premiums are commonly paid monthly, but they can also be paid over longer periods of time, such as every six months or once a year. The cost of your premium is determined by multiple factors including age, value of the insurance, total cost of coverage, past records, health and the number of insurance policies you hold with the company. Premiums are always paid by the holder of the policy, regardless of whether they ever make a claim.
Claims
It's inevitable that some insurance policies are going to need to be used, which is when claims come into play. Insurance claims are the way in which a policyholder can get money from the insurance company when problems, accidents or disasters do occur. The claim is only good for as much money as the terms of the policy allow.
Risk
Insurance policies also work by determining risk. Since insurance companies lose money each time a claim is filed, they want to insure that the more risk a policyholder presents to the insurance company, the greater is his premium to make up the difference. For example, someone who has been in several car accidents or has several traffic tickets will most likely pay a higher auto insurance premium than someone with a perfect driving record. Someone who smokes will most likely pay a higher health insurance premium versus someone who doesn't smoke due to the health effects cigarettes have on users.
Profit
Insurance companies make their money from the insurance policies that do not have claims filed on them. This allows them to use the money from these insurance policies to pay on claims from other insurance policies when disasters or accidents occur. The remaining income from payments from policies that have not filed claims goes towards keeping the company operating and paying expenses such as salaries.
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