Question

An insurance policy costs $110 and will pay the policyholder $11,000 for a major injury resulting in hospitalization or $3,500 for a minor injury. Which option provides better financial protection?

Answer 1

To determine better financial protection, compare the coverage amounts to the policy cost. For a major injury, the coverage is $11,000, and for minor injuries, it's $3,500, against a policy cost of $110. An example of premiums collected to cover automobile accident costs further illustrates insurance mechanics.

Step-by-step explanation:

The student has asked which option of an insurance policy provides better financial protection. To determine this, we can compare the financial impact of each coverage option relative to the cost of the insurance policy. The coverage for a major injury pays $11,000, and the coverage for a minor injury pays $3,500. The initial cost of the policy is $110.

Using the example of automobile insurance, we can illustrate how insurance works in a larger context. If we have a group of 100 drivers with varying accident costs, the insurance company needs to collect enough in premiums to cover the potential damages. If the total accidents costs are $186,000, and each of the 100 drivers pays a premium of $1,860 annually, the insurance company can cover all the costs.