Managing Risk What Insurance Is and Why People Purchase It
What Are Some Low-Risk Choices That People Make? • Drinking pasteurized milk • Eating a sandwich • Turning on a light • Making a telephone call • Taking a walk
What Are Some High-Risk Choices That People Make? • Motorcycling • Smoking • Drinking • Using drugs • Sport parachuting • Hang gliding • Riding bucking broncos
How to Reduce Risks • 1. Don’t do risky things • 2. Buy insurance
How Insurance Works • The purpose of insurance is to spread risk over many payers. • People who buy insurance form what is called a “pool.” • The money they spend to buy insurance can then be used to compensate members of the pool who suffer losses. • The money of the “pool” covers the relatively few members of the pool who will actually experience a loss.
Terms to Know • Premium = The amount you have to pay an insurance company each month to be “covered” • Policy/ Coverage= a legal contract that explains all of the details about what is covered (and not covered), how much you have to pay every month, and how much the company will compensate you in case of a loss
Terms to Know • Deductible = The portion of a loss you have to pay before the insurance company starts paying • Co-Pay = The amount you have to pay each time you see a doctor or have a prescription filled. The insurance company pays some of the cost; you “co-pay” the other. • Liability = the part of your insurance that covers injury you cause to other people.