What is insurance, and why is it essential to have one?

With the rapid development of technology, life has somehow accelerated. People became more and more nervous, indecisive, and more problematic with the everyday organization. This was especially felt in the management of finances and life in general.

As everything became somehow more uncertain and short-term, the importance of insurance companies became more and more critical. Somehow, people desire to insure themselves for life and know exactly what they are investing their hard-earned money in.

Therefore, insurance companies are regulated by relevant authorities such as FINMA are of extreme importance nowadays. But before we give you a proper explanation of why insurance companies matter so much today, let’s get to know what insurance means in the first place, shall we?

Insurance – definition and explanation

Insurance represents a safety net that helps people recover after some unexpected, lousy event such as a lawsuit, theft, fire, or accident. Once a person purchases insurance, he gets an insurance policy representing a legal contract between an insurance provider and that person.

After a suffered loss is covered by that person’s policy and filled with a claim, insurance is responsible for paying that person or designated recipient a beneficiary based on the terms of the person’s policy.

What’s extremely hard for people when considering dealing with insurance is that they feel that they’re paying for something they’re hoping they’ll never need to use in the future. It’s like they’re expecting something wrong to happen to them. However, suffering an inevitable loss or bad event without insurance can be the worst scenario, leaving you in a challenging financial situation.

What is an insurance company?

An insurance company is selling the promise to pay for certain expenses in exchange for a regular fee that’s known as a “premium”. These companies assess risks and charge premiums for numerous types of insurance coverage.

If some insured event happens and a person suffers some damages, the insurance company is obligated to pay up to the amount agreed in the insurance policy. For instance, if one decides to purchase health insurance, the insurance company should pay for the agreed medical bills of a client.

How do insurance companies make a profit?

Insurance companies can pay all these expenses and still make a profit. The majority of insurance companies generate revenue by either:

  • Charging premiums in exchange for insurance coverage
  • Reinvesting these premiums into other interest-generating assets

It’s almost like any other private business out there. Insurance companies are trying to minimize administrative costs, as well as to try to market effectively.

Benefits of insurance

There are plenty of reasons why people should have insurance. We want to point out some of its essential benefits of it:

  • It’s known as a powerful financial tool that helps you live more relaxed and secure, knowing that you’ll have a backup plan if something goes wrong.
  • Life insurance means your family doesn’t have to move out of the house; you can afford your kids to go to their desired college one day.
  • Auto insurance could mean having extra cash that will be helpful when it comes to vehicle repairs.
  • Insurance, in general, is beneficial to all since it helps people keep their life on track no matter what bad situation they might face one day in the future.