Financial Dictionary -> General Finance -> Insurance

Insurance is a way to secure an asset, idea, person or virtually anything that has worth, which is at risk of damage and loss in value. It works on the promise that the issuer of the insurance will pay the insured person or business a lump sum of money should the asset insured against become damaged or incur a loss. The specific parameters of the "damage" or "loss" are agreed upon beforehand. For example a building may be insured against structural fire damage, but not on the contents inside.

The payout however is not made out of the issuers own pocket, but by the business or person that was granted insurance. As part of the agreement the person taking out insurance pays an insurance company a certain amount at regular intervals, and should the damage or loss occur, this holding pot of money is then paid out to theoretically cover the costs. The amount paid out does not necessarily equal the amount paid in and either side can see a loss. The insurance company makes a profit on those that never need to cash out their insurance policy or those that violate the terms, similar to a default on a loan agreement.

There are many different subject specific insurance policies on offer, and some are even required by law, such as car insurance. Common forms of insurance include health insurance (where a person will receive a payout should they fall ill and be unable to work), life insurance (in case a loved one dies and can no longer contribute to the family income) and contents insurance (which protects the items in a house in case of a robbery or fire). There are well over 100 types of insurance commonly available.

Insurance is about hedging a risk. You may end up out of pocket, but if an accident does happen you'd be even more out of pocket. It all comes down to the individual.