Insurance Policy

Insurance works by pooling risk. Many people pay premiums into a common pool, and the insurer uses that money to pay the claims of the few who suffer losses. Each policyholder exchanges a small, certain cost for protection against a large, uncertain one.

A policy sets out what is covered, such as damage to a car, illness or death; what is excluded; how much the insurer will pay at most, called the limit; and how much the policyholder must pay themselves before cover begins, called the deductible or excess.

For example, a homeowner might pay a premium of 600 a year for a policy that covers up to 300,000 of damage to their house from fire, storms or theft.

Premiums depend on how likely and how large a claim is expected to be. A young driver with a powerful car usually pays more for car insurance than an experienced driver with a small car.

Common types include health, life, car, home, travel, disability and business insurance. Reading the policy carefully matters, because exclusions and conditions determine what will actually be paid when a claim is made.