WHAT IS INSURANCE?

An insurance policy is a legally binding contract between an insurance company and the person who buys the policy, commonly called the "insured" or the "policyholder." In exchange for payment of a specified sum of money, called the "premium," the insurance company agrees to pay the "beneficiary" (or for some benefits, the "owner") of the policy a fixed or otherwise determinable amount of money, if circumstances that are set out in the policy, occur. Another way of looking at insurance is to consider that it is a group of people getting together and paying on a regular basis into a 'pooled' account. If any of them need to claim off the insurance because of some personal calamity, the money is there to enable this to happen. In that way, insurance serves as a risk transfer mechanism by which people or businesses can shift some of their uncertainties or risks to the insurance companies. The insurance companies charge a fee, known as a premium, for accepting these risks, and in return, agree to pay for the financial losses that the policyholder may suffer.