Wednesday, June 27, 2007

Insurance is pooling of risk

Insurance is pooling of risk. If we have a large group of people joining an insurance scheme, everyone pays a contribution to the pool. The contribution is used to pay benefits to those few who have to make a claim for the insured event, e.g. death or accident.

If you join a pure insurance scheme, the cost should be quite low. It is based on the total amount of claim divided by the number of people, plus a small loading to cover the expenses.

Unfortunately, the real cost to the consumer could be much higher, due to the following factors:

* the pure insurance is combined with some other benefits, such as savings and investment

* a proportion of the premium is used to pay the commission for the adviser to sell the product

* the consumer may not get a good deal

If you buy the simple product that offers only the pure insurance, you will be able to compare the prices charged by a few insurance companies. You can get a product that offers you the coverage at a modest cost.

Lesson: Go for the simple products that you can understand and make a comparison. You can get a better deal.

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