RISK CAN BE THOUGHT OF AS THE POSSIBILITY OF INCURRING A LOSS. EVEN IF YOU ARE VERY CAREFUL, YOU PROBABLY WILL NOT BE ABLE TO AVOID ALL LOSSES. ECONOMIC RISK CAN BE RELATED TO PROPERTY LIABILITY AND ONE’S OWN PERSONAL WELL BEING. ECONOMIC RISKS CAN BE PLACED INTO THREE CATEGORIES: PERSONAL RISKS, PROPERTY RISKS, AND LIABILITY RISKS. PERSONAL RISKS ARE RISKS ASSOCIATED WITH ILLNESS, DISABILITY, LOSS OF INCOME, UNEMPLOYMENT, OLD AGE, AND PREMATURE DEATH. THE RISKS OF DAMAGE TO OR LOSS OF PROPERTY DUE TO THEFT, WIND, FIRE, FLOOD, OR SOME OTHER HAZARD ARE CALLED PROPERTY RISKS. WHILE PERSONAL AND PROPERTY RISKS INVOLVE ECONOMIC LOSSES TO YOU, LIABILITY RISKS ARE POTENTIAL LOSSES TO OTHERS THAT OCCUR AS A RESULT OF INJURY OR DAMAGE THAT YOU MAY HAVE CAUSED. YOU CAN INSURE AGAINST ALL OF THESE TYPES OF RISK.

INSURANCE IS THE PLANNED PROTECTION PROVIDED BY SHARING ECONOMIC LOSSES. YOU WILL HAVE TO LEARN ABOUT SEVERAL KINDS OF INSURANCE IN THIS UNIT, BUT THEY ALL HAVE ONE THING IN COMMON. INSURANCE PROVIDES YOU WITH THE PEACE OF MIND THAT COMES FROM KNOWING YOU ARE PROTECTED FROM ECONOMIC LOSS. WITH INSURANCE, A HOUSE FIRE, CAR ACCIDENT, APPENDECTOMY, OR EARLY DEATH WILL NOT CAUSE YOU OR YOUR FAMILY ECONOMIC DIFFICULTIES.

INSURANCE COMPANIES ARE BUSINESSES THAT PROVIDE PLANNED PROTECTION AGAINST ECONOMIC LOSS. INSURANCE COMPANIES AGREE TO ASSUME CERTAIN ECONOMIC RISKS FOR YOU AND TO PAY YOU IF A LOSS OCCURS. THE PERSON FOR WHO THE RISK IS ASSUMED IS KNOWN AS THE INSURED OR POLICYHOLDER.

TO SHOW THAT RISKS HAVE BEEN ASSUMED, THE COMPANY ISSUES A CONTRACT TO THE POLICYHOLDER. A CONTRACT ISSUED BY THE INSURANCE COMPANY FOR COVERAGE FOR THE POLICYHOLDER IS CALLED A POLICY. THE POLICY STATES THE CONDITIONS TO WHICH THE INSURANCE COMPANY AND THE POLICYHOLDER HAVE AGREED. FOR EXAMPLE, A POLICYHOLDER MAY AGREE NOT TO KEEP GASOLINE IN THE HOUSE, NOT TO ALLOW AN UNLICENSED PERSON TO DRIVE AN INSURED CAR, OR NOT TO GO SKYDIVING.

THE AMOUNT THE POLICYHOLDER MUST PAY FOR INSURANCE COVERAGE IS CALLED A PREMIUM. THE POLICYHOLDER USUALLY MAKES PAYMENTS ONCE A MONTH, ONCE EVERY SIX MONTHS, OR ONCE A YEAR. THE PREMIUMS FROM ALL THE POLICYHOLDERS MAKE UP THE FUNDS FROM WHICH THE COMPANY PAYS FOR CLAIMS.

A CLAIM IS A POLICYHOLDER’S REQUEST FOR PAYMENT FOR A LOSS THAT IS COVERED BY THE INSURANCE POLICY. A DEDUCTIBLE IS AN AMOUNT YOU MUST PAY BEFORE THE INSURANCE COMPANY PAYS A CLAIM. FOR EXAMPLE, IF YOUR CAR SUFFERS $2,500 DAMAGE IN AN ACCIDENT AND YOUR DEDUCTIBLE AMOUNT IS $500, YOU WOULD PAY $500 AND THE INSURANCE COMPANY WOULD PAY $2,000 (DAMAGES $2,500 – $500 DEDUCTIBLE = CLAIM $2,000).

BOTH CONSUMERS AND BUSINESSES ARE ABLE TO BUY INSURANCE TO COVER ALMOST ANY KIND OF ECONOMIC LOSS. VIOLINISTS CAN INSURE THEIR FINGERS, PROFESSIONAL ATHLETES CAN INSURE AGAINST INJURIES, AND WRITERS MAY INSURE THEIR MANUSCRIPTS. BUSINESSES ARE ABLE TO INSURE AGAINST THE LOSS OF RENT FROM PROPERTY DAMAGED BY FIRE, INJURY TO CONSUMERS CAUSED BY A FAULTY PRODUCT, OR THEFT BY EMPLOYEES. THE KINDS OF INSURANCE PROTECTION THAT WILL BE IMPORTANT TO MOST PEOPLE, HOWEVER, ARE INSURANCE FOR AUTOMOBILES AND HOMES, LIFE INSURANCE, HEALTH INSURANCE, AND INSURANCE FOR INCOME SECURITY.

LARGE BUSINESSES OR INSTITUTIONS ARE SOMETIMES ABLE TO INSURE THEMSELVES AGAINST CERTAIN KINDS OF LOSSES. A COMPANY MIGHT, FOR EXAMPLE, DETERMINE THAT THE AVERAGE COST FOR DAMAGES TO ITS FLEET OF COMPANY CARS IS $25,000 PER YEAR. IT THEN ESTABLISHES A SPECIAL SELF-INSURANCE FUND FOR THIS PURPOSE EACH YEAR. IN THIS WAY, THE BUSINESS CAN INSURE ITSELF AGAINST THE ECONOMIC LOSSES ASSOCIATED WITH AUTOMOBILE DAMAGE.

POLICYHOLDERS SHOULD KNOW EXACTLY WHAT PROTECTION IS PROVIDED BY THE KINDS OF INSURANCE THEY HAVE. SOME PEOPLE FAIL TO TELL THEIR INSURANCE COMPANIES ABOUT LOSSES THEY SUFFERED BECAUSE THEY DID NOT KNOW THAT THEIR POLICIES COVERED THOSE LOSSES. OTHER PEOPLE HAVE ASSUMED THAT LOSSES THEY SUFFERED WERE COVERED BY THEIR INSURANCE, ONLY TO FIND OUT BY READING THEIR POLICIES THAT THE LOSSES WERE NOT COVERED.

SOME INDIVIDUALS, FAMILIES, AND BUSINESSES HAVE DECIDED THAT THE BEST WAY TO PROTECT AGAINST ECONOMIC LOSSES IS THROUGH SELF-INSURANCE. SELF-INSURANCE MEANS THAT THE INDIVIDUAL, FAMILY, OR BUSINESS ASSUMES THE TOTAL RISK OF ECONOMIC LOSS. FOR INSTANCE, A FAMILY MIGHT REGULARLY PLACE MONEY IN A SAVINGS ACCOUNT TO COVER POSSIBLE FINANCIAL LOSSES. MOST FAMILIES, HOWEVER, WOULD FIND IT ALMOST IMPOSSIBLE TO SELF-INSURE AGAINST ECONOMIC CATASTROPHES SUCH AS THE COST OF AN EXTENDED ILLNESS OR THE COST OF REPLACING A HOUSE THAT WAS DESTROYED BY A FIRE.

INSURANCE COMPANIES ARE ALWAYS LOOKING FOR WAYS TO REDUCE THE COST OF PREMIUMS TO POLICYHOLDERS. THE PREMIUM CHARGED FOR EACH TYPE OF POLICY IS DETERMINED PARTLY BY THE PAST EXPERIENCES OF INSURANCE COMPANIES IN PAYING FOR THE KINDS OF LOSSES COVERED BY EACH POLICY. FOR EXAMPLE, INSURANCE COMPANIES HAVE FOUND THAT A 20-YEAR-OLD DRIVER IS A GREATER RISK BECAUSE HE OR SHE IS MORE LIKELY TO HAVE AN AUTO ACCIDENT THAN A 40-YEAR-OLD DRIVER. THEREFORE, CAR INSURANCE PREMIUMS FOR 20-YEAR-OLD DRIVERS ARE HIGHER THAN THEY ARE FOR OLDER DRIVERS.

PREMIUMS CHARGED A POLICYHOLDER ALSO ARE AFFECTED BY THE COST OF REPLACING THE INSURED ITEM. IF YOU INSURE A LUXURY CAR, PREMIUMS WOULD BE HIGHER THAN THEY WOULD BE FOR A LESS EXPENSIVE MODEL.

THE LARGER THE NUMBER OF CLAIMS AN INSURANCE COMPANY HAS TO PAY, THE HIGHER THE PREMIUMS FOR THE POLICYHOLDER. THEREFORE, INSURED PEOPLE PLAY AN IMPORTANT PART IN DETERMINING THE COST OF INSURANCE. BY LOCKING DOORS AND DRIVING DEFENSIVELY, LOSSES ASSOCIATED WITH THEFTS AND AUTOMOBILE ACCIDENTS CAN BE REDUCED. PRACTICING GOOD HEALTH HABITS WILL REDUCE LIFE AND HEALTH INSURANCE COSTS.

EVERYONE BENEFITS IF THE LOSSES COVERED BY INSURANCE DECREASE. ASSUME, FOR EXAMPLE, THAT THERE IS A DECLINE IN LOSSES CAUSED BY FIRE AND THAT FIRE INSURANCE PREMIUMS ARE REDUCED AS A RESULT. IF YOUR FAMILY OWNS A HOUSE AND HAS FIRE INSURANCE ON IT, YOU GAIN DIRECTLY BECAUSE YOU PAY LOWER PREMIUMS. IF A BUSINESS OWNER PAYS LOWER PREMIUMS, EXPENSES WILL BE LESS AND PRICES ON GOODS AND SERVICES MAY BE LESS. ANYTHING THAT YOU CAN DO TO REDUCE LOSSES COVERED BY INSURANCE HELPS YOU AND THE ENTIRE COMMUNITY.

INSURANCE PROTECTION CAN BE ACQUIRED IN SEVERAL WAYS. SOMETIMES AN EMPLOYER WILL PROVIDE INSURANCE FOR YOU AS PART OF YOUR COMPENSATION. FOR EXAMPLE, EMPLOYERS MAY PAY ALL OR PART OF LIFE AND/OR HEALTH INSURANCE PREMIUMS FOR THEIR EMPLOYEES.

HOWEVER, IN OTHER CASES, YOU WILL BUY INSURANCE DIRECTLY FROM AN INSURANCE AGENT. AN IMPORTANT PART OF AN INSURANCE AGENT’S JOB IS TO HELP YOU SELECT THE PROPER KIND OF PROTECTION FROM ECONOMIC LOSS. THERE ARE TWO BASIC TYPES OF INSURANCE AGENTS. ONE WORKS FOR A LARGE INSURANCE COMPANY AND SELLS ONLY POLICIES WRITTEN BY THAT COMPANY. THE OTHER IS AND INDEPENDENT AGENT WHO MAY SELL MANY KINDS OF POLICIES FROM A NUMBER OF DIFFERENT COMPANIES.

INSURANCE IS IMPORTANT TO EVERYONE BECAUSE IT PROVIDES ECONOMIC SECURITY. IF YOU HAVE NO INSURANCE, YOU COULD PROBABLY TAKE CARE OF SMALL LOSSES SUCH AS THOSE RESULTING FROM MINOR ACCIDENTS. HOWEVER, A LARGE LOSS FROM A FIRE OR SERIOUS ILLNESS COULD BE A REAL FINANCIAL HARDSHIP. PROTECTION AGAINST SUCH MAJOR EVENTS GIVES EVERYONE A FEELING OF SECURITY.

INSURANCE ALSO HELPS OUR ECONOMY. INSURANCE MAKES IT POSSIBLE FOR MANY PEOPLE AND BUSINESSES TO DO THINGS THEY OTHERWISE COULD NOT DO. SUPPOSE THAT SOMEDAY YOU WANT TO BUY A $100,000 HOME BUT CAN MAKE ONLY A $10,000 DOWN PAYMENT. YOU WILL NEED TO BORROW $90,000. IT IS VERY DOUBTFUL THAT ANYONE WOULD LEND YOU THAT AMOUNT AT A REASONABLE RATE IF THE HOUSE WERE NOT INSURED. MONEY TO BUY A NEW CAR CANNOT BE BORROWED AT A REASONABLE RATE UNLESS THE CAR IS INSURED AGAINST RISKS SUCH AS THEFT AND COLLISION.

PREMIUMS COLLECTED BY INSURANCE COMPANIES ARE INVESTED. MANY INSURANCE COMPANIES, MAINLY LIFE INSURANCE COMPANIES, ALSO USE PREMIUM MONEY TO MAKE LOANS. THE LOANS ARE USED TO BUILD GOVERNMENT AND PRIVATE BUSINESS PROJECTS, WHICH HELP OUR ECONOMY GROW.