6 - Insurance

Abstract

This chapter focuses on the concept of insurance. Insurance is purchased from an insurance company, though many firms set aside money for a self-insurance program. The amount of insurance purchased is the face of the policy. The payments made by the insured to the insurance company are called the premiums. The amount of a premium payment depends on several factors. If the insurance company cancels the policy, a different set of rules applies. The total premium is prorated over the entire insurance period. If a one-year policy is cancelled by the insurance company after one-fourth of the year, one-fourth of the premium is kept by the company and three-fourths are refunded to the insured. Insurance companies cannot afford to pay losses in full; if they did, their rates would become so high that no one would want to be insured. To assist both sides, a practice known as coinsurance has evolved.