The big ideaMany people pay a little so the few who have a big surprise cost are helped.
How it works
A risk is a chance of a costly surprise, like a river flooding a cellar.
Many families pay a small share into a pot, so a few who have a big bill are helped. That is insurance.
The small yearly payment is a premium. Asking the pot to pay is a claim.
Coins nobody needs stay in the pot for a wetter year. A calm year is the plan working.
Flooded cellars on Marsh Lane. Each one is a 10-coin bill.Before the plan and with the pot.
Example 1: The pot in year one
20 families each put in 1 coin: 20 × 1 = 20 coins.
Two cellars flood at 10 coins each: 2 × 10 = 20 coins.
The pot pays both bills and is empty.
Example 2: The pot in year two
Another 20 coins go in.
One cellar floods, so the bill is 10 coins.
20 − 10 = 10 coins stay in the pot.
Example 3: The pot in year three
10 coins are left over and 20 new coins go in: 10 + 20 = 30 coins.
Three cellars flood at 10 coins each: 3 × 10 = 30 coins.
The pot holds exactly enough.
Example 4: The fair share
One year's bills were 20 coins, shared by 20 families.
20 ÷ 20 = 1 coin each.
That fair share is the premium.
Words to know
risk
A chance of a costly surprise.
insurance
Many share a small cost so a few do not face a big one alone.
premium
The small yearly payment into the pot.
claim
Asking the pot to pay a bill.
Watch out
Insurance does not stop a flood. It shares the cost of one.
A dry year is not wasted. The premium buys peace of mind.
The pot pays only for floods that really happen, so a claim is checked.
Every family pays the same premium. The pot pays whoever has a claim, not the one who paid the most.
Try it
Twenty families each put in 1 coin. How many coins are in the pot?
The pot holds 30 coins and pays one 10-coin bill. How many coins stay in the pot?
Is the small yearly payment into the pot a premium or a claim?
Answers: 1. 20 coins · 2. 20 coins · 3. A premium
Try at homeAsk a grown-up about one big surprise cost that people share, like a storm or a broken car. Who helps to pay for it?
For grown-upsReal insurers keep extra coins for a very wet year and charge a little more to cover their own work, and real rules differ by place. Talk about one big surprise cost that many people share, like a storm, and who helps to pay for it.
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