Money 101

Lesson 5: How Insurance Works

How Insurance Works

What are the chances that your house burns down tomorrow? Slim, we hope. But homeowners still carry fire insurance because it would be financially crippling if it happened. Insurance is there to protect against those one-in-a-million awful events. Lots of people pay the insurance company a small amount of money in premiums (though it might not always feel small). Then, if someone’s house burns down or someone is injured in a car accident or any number of other unfortunate events occur, the insurance company can pay out a large sum to the victim.

Fun facts:

  • At the height of his career, English soccer star David Beckham’s legs were insured for £100 million.
  • Actress Shirley MacLaine reportedly owns a $25 million insurance policy protecting her fortune against alien abduction.
  • Heidi Klum’s legs were insured for $2 million by a client. Her left leg was less valuable since it has a small scar.

When do you need new insurance?

Your insurance needs typically change with major life events and milestones—all those times when there may be new people or new things in your life that need protecting.