Insurance may be defined as an agreement by which the insured person is guaranteed to get a compensation for his loss. The loss can have several forms. It can mean the loss of money, damage, medical illness and injury, death etc.

Participants in the process are:

  1. The insurer (insurance carrier) – the company which sells the insurance.
  2. The insured (policyholder) – the person who buys the insurance policy.


The insurance policy is a document which contains all the details about terms and conditions of a given insurance. The policyholder pays the premium (often on a monthly basis) and the insurer is obligated to pay if the loss defined in the policy happens to the insured.

How does it work?

If there are many insured entities that put premiums into the insurance fund, than the money can become available for some of them when they confront the loss. The idea is really simple. Premiums of insured people go into one pool and that is where money comes from when there’s a need for a payment. There are always more people putting the money to than getting it from the pool, so there’s no problem with payoffs.


There are four main types of insurance:

  1. Co-insurance – when insurers share the risk;
  2. Dual insurance – when two or more policies are chosen instead of one;
  3. Self insurance – when the risk doesn’t transfer to the insurance company but the insured entities retain it for themselves;
  4. Reinsurance – when the risk is transferred from one insurer to another.

Choosing one of them is personal decision. All have their own pros and cons compared to the others. Different insurance needs call for different types of insurance.

What can be insured?

In general, there are three types of risk:

  1. Personal – risk of losing the life, health or income;
  2. Property – risk of losing assets from natural or personal causes (robbery, fire, flood etc.);
  3. Liability – risks people have towards other people.

Everything that can be insured falls under these three categories. There are some policies that the most people have, meaning they have the greatest value. Those policies are:

  1. Disability insurance – a policy that enables the disabled one to continue living and having income without working;
  2. Life insurance – a policy that ensures that those who depend on the insurer don’t have to worry about the income in case he passes away;
  3. Health insurance – a policy that covers many medical costs;
  4. Homeowners insurance – a policy that covers any damage on the property of the insurer;
  5. Car insurance – a policy that covers the expenses in case of car accident.