Brainstorm ways with your child that you--or anybody else--could lose a lot of your money. Your child might come up with business-related ideas, but steer her towards thinking about catastrophic events instead. For example, you might think of ideas such as "should an earthquake destroy the house," "someone could get very sick and the doctor's bills could add up," or "you could accidentally hurt someone else in a car crash and get sued for lots of money."
Explain to your child that in each of these scenarios, you would actually not lose all of your money, and all because of insurance. Tell him that every month (or year) you pay a certain amount of money towards auto insurance, life insurance, health insurance, and home insurance, and in return, the insurance company promises that it will pay a certain amount if you ever experience one of the catastrophes that your child listed.
To explain how an insurance company works, give your child fake money (such as from a board game) or a handful of change, and have your child divide the money into several piles. Explain that each pile of money belongs to a different person. Then have each person give one dollar (or one penny) to the insurance company, and explain that this is like the insurance premium. Repeat this three times (for three months of premiums), and then pretend that one person who owns a pile of money undergoes a catastrophic event. Show your child how a large chunk of the money from the insurance company's pile will go to pay for that event, and that the company keeps the rest of the money for itself to pay its employees.
Discuss the pros and cons of various types of insurance, such as PPO, HMO, POS, Whole Life, Term Life, and Long Term Care. If possible, have your child do some online research about the differences between these types of insurances and draw her own conclusions about the pros and cons of each.
Show your child your insurance papers, and explain to them how your own insurance works. Compare the insurance that you have with the ideal insurance that your child chose in the previous step. Discuss why you made the choice you did, and use any disagreements as a topic for mature debate and as a motivation for additional research about insurance.