When you get that bill in the mail every month for whatever kind of insurance you’ve got to pay, most people groan and grumble. After all, most people never use their insurance, so paying for something every month without seeming to get anything in return seems like a waste of money. But the truth is that insurance is an essential part of society.
When you buy insurance, you are mitigating risk. Whenever you do anything in life, there are risks involved. When you walk down the stairs, you might fall. When you drive your car, you might crash. If you own a home, there may be some kind of an accident and the house will burn down.
When these things happen, they will generally come with an incredibly high price. And most people don’t have that kind of cash lying around. That’s where insurance comes in. Insurance is designed to pay for these things if they happen.
And the good news is that if you do have to use insurance to pay for something, such as a house that has been damaged by fire, or if you happen to total your car, the amount you will receive to pay for the damage will generally be much more than the amount you’ve paid into insurance.
How can this be possible? How do insurance companies stay in business? It is based on something called the “Law Of Large Numbers.” This means that the larger the number of people, (or houses or cars) the more accurately the insurance companies can predict how many incidents will happen in a year.
They they can calculate how much it will cost to pay for all these incidents. After adding in their operating costs, they divide this number by the total people participating in the insurance plan. It’s a little bit more complicated than this, but this is the general idea.