What is the purpose of insurance?
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Q:

What is the purpose of insurance?

A:

Quick Answer

The fundamental purpose of insurance is to spread out the risk of individual investments among many parties to reduce the risk to any individual member of the pool in the event that an investment fails. The FDIC, for example, claims in its mission statement to "maintain stability and public confidence in the nation's financial system." It does this by accepting the risk of depositors, which guarantees the solvency of banks.

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Full Answer

The forms of insurance most familiar to most people are health, property and life insurance. The purpose behind each of these is similar, and they can be understood on the same terms. Concerning car insurance, About.com brings up the sense of frustration that people sometimes feel from paying their insurance premiums month after month with nothing to show for it. This is understandable, but by grouping many people who seldom or never file a claim together into a risk pool and charging them all a premium, the insurance provider accumulates enough money to pay out to whichever members of the pool suddenly do need help. In effect, the other drivers in the risk pool have covered the inevitable cost of replacing a stranger's car in exchange for the promise that the stranger would do the same for them.

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Related Questions

  • Q:

    How does insurance work?

    A:

    Insurance is essentially a group-oriented risk management strategy: insurance companies cover individuals and families in the event of losses and accidents by pooling money received by people with similar risks, which allows the sharing of losses and expenses. Insurance acts as a protective mechanism for citizens and companies. It requires some financial sacrifice by customers, but those people in turn receive financial coverage in the event of unforeseen accidents, ensuring they never have a total loss.

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  • Q:

    What is auto insurance?

    A:

    Auto insurance provides coverage against financial loss in the event of an accident. An auto insurance policy is a contract between the vehicle owner and an insurance company, whereby the owner pays a premium to receive coverage for damages, repairs and other costs stipulated in the contract.

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  • Q:

    What is travel insurance?

    A:

    Travel insurance is a type of insurance that reduces the risk of any type of travel. It can be bought by individuals or families who are travelling domestically or internationally.

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  • Q:

    What are advantages and disadvantages of life insurance?

    A:

    Advantages of life insurance include financial protection in the event of an accident or unfortunate event, while disadvantages include undergoing the time-consuming and tedious process of searching for and selecting a plan, and sacrificing money for coverage. Life insurance classifies as a term insurance, meaning that it has a finite period of coverage. Like other types of insurance, consumers search for policies and plans in several categories, including basic-level coverage, mid-level coverage, and high-level coverage, which typically requires the largest financial investment and offers the most comprehensive coverage.

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