Amazing Kids! Magazine

An Introduction to Insurance

By Fatima Yousuf, Money Smarts Editor and Contributing Writer

 

Think of everything that could go wrong in your life. What if your city floods tomorrow and you lose your home? What if fires ravage your region next week and your home is left burnt and desolate? What if a tornado passes by your house next month and you are struck by flying debris, leaving you with several broken bones? Or maybe next year you crash your car and are badly in need of a life-saving surgery. What will you do then?

All of these incidents, terrible as they are, require money to fix. If you crash your car, at some point you will need to pay someone to fix the dents. If you get injured badly, you are going to need to pay a doctor to heal you. And if you burn your home, then at some point you will need to pay a contractor to fix the burnt area, or you will need to buy a new home to live in.

This is where insurance comes into help. With an insurance policy, you are given a safety net which you can land on in the event that anything terrible happens to you or your family. To understand the principle behind insurance, consider this scenario. Suppose that there is a school with exactly 100 students and every month one student breaks an arm. If the cost for fixing one student’s arm totals up to $1,000, then this means that the parents of every student at that school will have to save $1,000 in case it is their child that breaks an arm that month. If the parents’ child breaks an arm that month, then they will lose $1,000 from their savings. However, if their child does not break an arm that month, then they can add $1,000 to their savings.

This system does not work well for everyone since every month one family will lose $1,000 from savings. However, parents can spread out the responsibility by having everyone pitch in $10 every month. Every time a student breaks an arm, all the money that every parent put aside for this incident would go towards making sure that the student’s arm is fixed. This way, every parent will lose only $10 every month instead of putting aside $1,000 in preparation for the possibility that his or her child would break an arm that month.

Insurance works very similarly to this scenario. Insurance companies offer insurance plans to people who want insurance in case something unfortunate occurs. As a part of this plan, you will have to pay a premium. A premium is a monthly payment to an insurance company. If you do have an insurance plan, then in exchange for your premium money, an insurance company will agree to cover the cost of whatever accident may occur to you. If we go back to the previous example, every month the parents paid a $10 premium that would go towards covering the medical costs of whichever student broke his or her arm. Your monthly premium payment usually varies based on your risk factors. For example, if you tend to get sick a lot, you will have to pay more in your monthly premium because it is more likely that you will go to the hospital. However, if you do not get sick often, then you will pay less in premiums because it is less likely that you will need to pay any hospital costs.

Another factor that will go into your insurance plan would be your deductible. A deductible is an amount you must pay out of your own pocket before the insurance plan will pay anything towards your loss. For example, if you are in a car accident in which it costs a total of $5,000 to fix the car and you have a $1,000 deductible, then you will be required to pay $1,000 to fix your car, and the insurance company will pay for the remaining $4,000.

In many ways, getting an insurance plan is a bit of a gamble. You never know whether or not you will be in an accident anytime in the future. However, by getting an insurance plan, you can ensure that you will always have a safety net to land on if anything terrible does occur, as you have a guarantee that at least some portion of the cost will be covered by your insurance company. Whether or not you get insurance when you are older is ultimately up to you and whether or not you want to take that gamble. However, knowing that you have options for what you will do during hard times can prove to be a great comfort and source of financial support.

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