How to Explain Insurance to Kids

Parents and teachers agree that it’s a priority to make students financially responsible. Whether you have a savvy 10-year-old asking how insurance works or you're preparing your high school student for independence, teach your child how insurance works.

Think of ways in which you -- or anybody else – might lose a lot of money. Think about catastrophic events, such as earthquakes, hurricanes, fires or someone who becomes sick -- which can cause huge medical bills -- or someone who has a car accident.

Tell your child that every month you pay a certain amount of money for auto insurance, life insurance, health insurance and home insurance. In return, the insurance company promises it will pay a certain amount of money to cover expenses if you experience a catastrophic event listed in your policy.

To explain how an insurance company works, give your child fake money -- such as from a board game -- and have your child divide the money into several piles. Explain that each pile of money belongs to a different insurance company. Then, have your child give one dollar to each insurance company. Explain that this money is the insurance premium. Repeat this three times, for three months of premiums. Then, pretend that someone had a catastrophic event. Show your child how a portion of the insurance company’s money will cover expenses and that the insurance company then keeps the rest to cover its operating expenses.

Discuss the pros and cons of various insurance organizations, such as a Preferred Provider Organization, a Health Maintenance Organization, a Point of Service plan and of policies such as Whole Life, Term Life and Long-Term Care insurance policies. If possible, have your child research these insurance and plan types so your child can have an informed opinion about the pros and cons of each.

Show your child the policies you have for your auto, home and health insurance plans. Explain how your plans work and discuss why you selected the companies and plans. Your decisions might be based on price or the range of options, or both. Answer questions your teen may have and ask your teen what he would do in the same position.