How Does Insurance Work?

It is important for everyone to protect their most valuable assets. This comes in the form of insurance. The purpose of insurance is to protect someone from a disaster that could otherwise contribute to financial ruin. There are a few points about insurance that everyone should know.

Home Insurance

For many people, their home is their most valuable asset. Some people spend their entire lives working hard to save up enough money to place a down payment on a house. Then, they spend decades paying off that house in the form of a mortgage. One of the most common types of mortgages spreads the payments out across 30 years. If someone’s house burns down, they might be completely underwater financially. They will be stuck with a mortgage on a house that they no longer own while they struggle to find another place to live. Homeowner’s insurance protects people from this disastrous event by providing them with a safety net. In the event their house is damaged or destroyed, the insurance company will take on the burden of paying off that loan.

When everyone contributes to home insurance, the insurance company has enough money to pay out those few claims that involve damage or destruction to houses. In essence, the many protect the few. On the other hand, what happens if there is a serious situation, such as a natural disaster, that requires the insurance company to pay out many claims at once?

Captive Insurance

Captive insurance companies are formed as an alternative to self-insurance. In this business format, the parent group creates a licensed insurance entity that is able to provide coverage for itself. There are several advantages to this business format. Traditionally, insurance companies will purchase coverage from another business; however, these policies might not meet the specific needs of the company. Furthermore, the pricing system might be volatile. Therefore, some companies elect to go with captive insurance instead.

With its own company, the parent business is able to insure difficult risks, cut their costs, access reinsurance markets, and increase its own flow of revenue. For this reason, captive insurance entities are a popular alternative to self-insurance.

The Importance of Insurance

Insurance is a critical entity because it provides protection against potentially disastrous consequences. Some of the other forms of insurance include life insurance, car insurance, and health insurance. It is incumbent on everyone to protect their most valued assets.