Eli5: How does insurance work ? How is it a good deal for both the customer and the company ?
In: Economics
Every year, you have a one in a million chance of having to pay a million bucks. You can’t save up a million to just have it ready should that happen. And besides it’s a one in a million chance. If you had the million wouldn’t you rather buy a house with it or something? So I make you a deal. I find a million other people with the same problem and you all pay be 2 bucks a year if I pay the one million when one of you is up. On average, I will get two million and have to pay out one million a year (one million people taking a one in a million chance). If you live for 100 years you have paid at most 200 bucks, never one million. Maybe you would have never had to pay the one million, but for a mere 200 bucks over your lifetime you never had to worry and if you had to pay the million, it wouldn’t be a problem at all. I, on the other hand, make a million bucks, every year.
In reality, the math works out a bit differently for every insurance, but this is the idea.
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