Risk and Insurance: Sharing the Big Problems

Lucy is twelve years old. She lives in Riverton with her parents and her brothers, Jack and Max. She loves her new green bike, which she bought after saving for months. She rides it to school, to the library and to the bakery every day.

One Thursday, her friend Ella comes to school with sad eyes. Someone stole her bike from the library rack on Wednesday night. Ella says that her family is upset, but Ella's mom said something surprising: "At least we had insurance."

At lunch, Lucy asks, "What is insurance?"

Ella says, "We pay a little money every month. Then, if something bad happens to the bike, the insurance company pays most of the cost to replace it. My mom made a claim today. They promised to send $100."

That evening, Lucy asks Dad. Dad says, "Let's check the numbers."

Dad shows Lucy an offer from the insurance company. For $4 a month, the company will pay up to $120 if the bike is stolen or badly damaged.

Risk and Insurance

A risk is the chance that something bad will happen. Nobody can know for sure which bike will be stolen. But the insurance company knows that, out of thousands of bikes, only a few will be. It collects a small premium from every customer. This is the regular payment. When a customer has a problem, the company pays a claim, which is a request for money to cover the loss.

Insurance does not stop the bad thing. It reduces the loss. Instead of one person paying $120, thousands of people pay a little each, and the few who are unlucky receive help.

But insurance also costs money every month. If nothing bad happens, the premium is gone. So the question is whether the protection is worth it.

Back to the Kitchen Table

Lucy thinks about it. A bike cost her months of saving. If it were stolen, she would be sad and also have no way to ride to school.

Lucy says, "If the bike is stolen, it would cost me $120. I don't have $120 in an emergency. I think $4 a month is worth it."

Dad nods. He says, "And you can always use a strong lock, too. It is good to lower the risk and protect against the loss."