8.1 Risk and Why We Use Insurance

Notes

Risk is the chance of a loss. Insurance lets many people share the cost of rare, expensive events.

• You pay a small, regular cost (a premium) so the insurer covers a large loss if it happens.
• Ways to handle risk: avoid it, reduce it (wear a seatbelt), accept it (save for small losses), or transfer it (buy insurance).
• Insure against losses you could not afford yourself. Small, affordable losses can be handled with savings.
• An insurance policy is the contract. Read what is covered and what is excluded.
• Example: a $150-per-month premium costs $150 \times 12 = 1800$, so $1,800 a year.