Eli5: How does insurance work ? How is it a good deal for both the customer and the company ?
In: Economics
So, making up numbers and information to simplify everything.
I pay $100 a month for home insurance. Regardless if I use it or not, I pay them $100 per month.
One day a tornado blows a tree and it comes though a window. I go to the insurance company and they help me cover part of the window, I pay $100 (this is my deductible) and they pay the remaining 500 owed to the window company And then I go back to paying $100 a month.
That is how insurance works. Now things start to get complicated. My $100 a month might be higher if I live in an older house in a Flood zone just because there’s a higher chance of problems.
Or it could be lower if I’m in a newer house with a bunch of safety features (whole house fire alarm and sprinklers for example)
The same system is similar for health insurance, and car insurance. For health insurance, I get a free checkup once a year, and specific things are covered at 80% after I meet my deductible of 2000 per year. But health insurance has the issue of not every doctor accepts their insurance so you might get charged more. This is called out of network.
Car insurance is extremely complicated with multiple types of coverage for multiple scenarios. There’s if the person doesn’t have insurance, if you are at fault, all in one, etc etc.
they also look at your driving record and the car you drive. If i have been in 5 accidents and drive a 2000 car, it’ll be pretty high because I’m a bad driver in their eyes driving an old car.
On the other hand, if I’m driving a brand new car filled with safety features, and have 0 accidents, my rate will be lower as I’m driving a new and safer car and am a good driver.
You pay insurance money and they help cover costs when things go wrong. They charge you more or less if you try to make things “easier” for them and less likely for them to have to pay you money.
Hope this helps!
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