This is a beta course, so its structure, chapters, and examples may continue to change.
Basic Insurance Concepts
The essence of insurance is “trading a small-probability large loss for a high-probability small expense”. Insure the major risks first, and only then consider investment-type products.
Definition
A definition is a precise description of what a concept, a term, or an object means. Understanding definitions is the foundation of learning any field, and every concept has its own exact meaning.
Insurance
A risk transfer arrangement in which you pay a small premium to an insurance company in exchange for an agreed payout if a specific covered risk occurs.
- Premium: the money you pay.
- Sum assured: the maximum amount the insurance company will pay out when a claim is made.
- Deductible / waiting period: no payout is made for amounts or incidents within that threshold or period.
- Waiting period: an observation period after the policy takes effect during which claims are not covered (common in medical and critical illness insurance).
- Scope of coverage: the situations that the contract defines as payable.
- Personal accident insurance (covers high-frequency, low-cost accidents)
- Medical insurance (covers large medical expenses)
- Critical illness insurance / term life insurance (fills the gap left by family obligations)
- Everything else (travel insurance, property insurance, and so on, as needed)
- The older you are and the worse your health, the higher your premium — and you may even be refused cover or charged extra.
- Declare your health status truthfully, and avoid “insuring while already ill”, which leads to claim denial.
Accident and medical insurance cover the high-frequency, high-impact sources of spending, and their premiums are low while their leverage is high, so they can immediately reduce the risk of a huge bill.