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1. Insurance is a legal contract between you and an insurance firm. The insurance firm agrees that if you pay a specified amount, known as a premium, the firm will compensate you for certain kinds of losses or events, such as death, sickness, accident, loss of ability to work, and legal expenses.

2. The purpose of insurance is to make our lives more predictable from a financial standpoint.

3. In regard to insurance, risk is the uncertainty one has concerning the occurrence of a loss. The four ways to manage this risk are the following: (1) avoid risk, (2) reduce risk, (3) assume risk, and (4) transfer risk.

4. According to Table 1, the two ways in which you can analyze risk are by (1) frequency of loss and (2) severity of loss.

5. The key to insurance is balancing the cost of reducing risk with the potential severity of a loss. This means you should insure yourself against the high-severity losses that would have a major impact on the financial condition of you and your family. In addition, you avoid, reduce, or self-insure yourself against other risks.

 



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