How Insurance Shares the Cost of Bad Luck

In the picture

1. 1A small premium: each household pays a little, regularly
2. 2The shared pool: everyone’s premiums collected together
3. 3The payout: a large sum sent to the one who needs it
4. 4The rare loss: damage that would be too costly for one family alone
5. 5The repair: the loss is fixed using money from the pool

Examples

• Home insurance pays to repair a roof after a storm drops a tree on it.
• Phone insurance replaces a smartphone that was stolen or smashed.

Quiz: How Insurance Shares the Cost of Bad Luck (Age 15)

1. 1

   Why can an insurance pool afford to pay for one person’s large loss?

   • Because the person who suffers the loss pays the money back later
   • Because each household’s premium is big enough to cover its own loss
   • Because many people pay in, but only a few need a payout at the same time
2. 2

   In insurance, what is a premium?

   • A small, regular amount each person pays into the shared pool
   • The total of all the money collected from everyone
   • The large sum sent to someone after they suffer a loss
3. 3

   What trade do you make when you buy insurance?

   • You pay a large, certain cost to avoid small everyday expenses
   • You pay a small, certain cost to be protected from a large, uncertain one
   • You take on a large risk in order to save small amounts of money

The answers, each with its explanation, are in the app. This lesson has left the free week, so its quiz is part of the subscription.