While all of us have or want to have some type of health insurance, be it short term health insurance, visitors insurance, or comprehensive long term insurance, we rarely wonder about how insurance actually works. Let us look at some of its basic principles.

The rationale behind insurance is the minimizing of risk. It corresponds to Man’s needs to keep most of his life planned and taken care of. While insurance does not prevent the actual event from occurring, it takes care of the financial impact of the event. How insurance accomplishes this is by the transference of risk.

The concept of insurance is based on the spreading of risk over several people. What that means is that a large group of people pay a small amount each and pay for the loss incurred by a smaller group within the larger group.

While this might seem like a raw deal for the group of people who do not actually use the benefits, remember that the risk factors determine how much each member pays into the pool—sort of like the office fantasy football league in reverse. So, we see that the old end up paying a higher premium, and get less coverage. So, you can rest assured that the premium determination is not just random.