People buy insurance all the time, but have you ever really wondered, “What is an insurance plan?” Insurance is a necessary thing and is often required by law. For instance, car owners must carry insurance on their cars to register and license their car. Homeowners are often required by their mortgage company to have insurance on their home.

But what is an insurance plan and how does it work?

Insurance companies take on the risk of financial loss in certain situations. They collect a small amount of money from each insured person and pool that money together to cover the cost of losses.

Insurance companies use probability and the law of large numbers to compute the cost of losses. They must make a profit to stay in business, but not so much that they lose business.

The more likely an event will occur, the more the insurance company will need to charge to cover that event.

The prices that insurance companies charge is subject to government regulation. The companies may not discriminate based on factors that do not directly contribute to the likelihood that an event will occur.


Here is some more helpful information about how insurance works.

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