How does insurance work in theory?

Question

Isn't the essence of any insurance is that you pay a small premium per month or whenever your insurance decides to take a count. In theory, is it not like saving money so that when in the event the insurance is insured for happens, that small premium or saving is consumed to pay for the event?

Is this not how all insurances work in theory? Is yes, then wouldn't saving the money yourself save you money since there's no middleman that has to be paid.

This completely ignored all sorts of complications that today's insurance has. So precisely, this is what I want to figure out. What is it that insurance today has that goes beyond the essence of how insurance work that saves the payer more money than if they would have just stashed the money away for emergency use themselves?

Answer 1

There are many different kinds of insurance. If you are talking about life insurance, some have a investment portion included that you will get back if you cancel the policy. That investment portion is very small but it is something. However, that kind of insurance is the most expensive - whole life. So, why do people buy it? Because those policies outlive us. Then cannot cancel on us. Whereas, term life ends at age 80 - most of those policies anyway. Medical science can keep most of us alive well after 80. The life insurance companies know this. Term is the least expensive and there is no investment portion. There is also Universal life. It offers the death benefit and investment portion, as whole life does but it is less expensive than whole life and is more flexible. However, you would have to examine each policy and compare the costs of each and only term is as flexible as you might want. And, great if you think you can save more over your lifetime. The problem with that is, what if you are young or middle aged and you die in 5 years? You won 't have saved anywhere near the death benefit that they would have paid. It is all a gamble, unless you know exactly when you will die. Insurance companies have the death stats so they can estimate your window of death from natural causes.

Answer 2

If its life insurance, then term would work best for smaller life premiums. However they expire. So lets say you pay $20 per month yet live to be $81 then you have to try to ge whole life insures which is going to expensive. So there is a trade off. You typically can't draw or borrow. HOWEVER I strongly advise you take a lot of time interview insurance compaies for quotes on both term and whole because typically does always apply. You'd be surprised how agents will work with you in trying to earn your business. But you would have to take some time otherwise you'll get a policy for piece of mind no knowing all the fine print that you should have ask for in the beginning to protect yourself. SHOP around. You'll get whats best for you if you just take time. Don't ever ever ever not ask any concers you have. You don't need to say yes at first. Tell them you want a brochure in the mail of if you can downloan one on their site.

Answer 3

The essence of insurance is shared (and therefore, distributed or "spread out") risk among a large group. By paying a relatively small amount (the insurance premium), you as an individual protect yourself against a catastrophic loss. Saving up the money you would pay in premiums won't help you if you suffer a serious loss.

Answer 4

Two problems wih your theory. One, the money the insurance cocmpany pays a claim with includes money from the people who are incured but don't have whatever happen to them. Second, what if the incident happens to you before you save up enough to pay for it, or your problem is very costly?

Answer 5

NO...that's not how insurance works. Insurance is a TRANSFER SYSTEM. Your premiums don't pay your claims. EVERYONE'S premiums this month pay for the claims paid out this month (in very general terms).