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Definition of Insurance Types
Insurance divides into three main categories: property/casualty, life, and liability. Most insurers are internally divided along these three lines as well, with the exception that sometimes property and life insurance are handled by the same division. Property and casualty insurance is insurance designed to reimburse the owner of certain real or personal property in the event that property sustains some sort of damage or destruction from a natural disaster, theft, embezzlement, or other dire circumstances.
Life insurance (also called accidental death or dismemberment insurance) is designed to reimburse injured parties following the death or injury of a specific person. Life insurance, disability insurance, and key-man insurance are all very similar and for the purposes of this discussion can all be treated as life insurance. Life insurance divides into three subcategories: whole, term, and universal. The categories are distinguished by their similarity to insurance or an investment (term insurance is purely insurance, whole insurance is purely investment, and universal insurance is a hybrid of the two, see Life Insurance previously).
Liability insurance is designed to protect businesses and individuals from tort/legal liability. More commonly called slip and fall insurance, liability insurance typically protects a business or person from liability caused by negligence or other unintended circumstances. From a consumer perspective liability insurance generally protects a consumer in auto accidents, dog bites, or other household accidents.
All insurance is based around the concept of a loss. Essentially, an insurance policy states that in the event of the loss the insurer will make some sort of monetary payment to protect the interest of its customer. This losses may include fire, flood, wind, other natural hazards, dog bites, auto accidents, negligence, death, disability, and many others. The insurer then, using rather complex math incorporating the probability of a loss occurring and the probable size of a loss once one occurs (most insured losses are rather small, which is why insurance companies will write policies providing insurance up to $0.5 million or $1.0 million with premiums of only a few hundred or thousand dollars, to determine what premium it should charge to cover the total of all expected losses and provide a profit for itself. Insurance policies are generally written on a claims occurring basis and provide coverage for a specific period of time, even though litigation or other complexities may cause it to be many years later before the insurer must make a payment on the loss, as such insurance companies generally reduce premiums by the expected earnings they can earn by investing the premiums until the losses are paid. The basic concept of insurance is that individuals and firms can protect themselves from losses in uncertain situations either where the amount of the loss is uncertain as in liability insurance or the timing of the loss is uncertain as in property and life insurance.