Insurance
Insurance is a contractual way to transfer financial risk to an insurer in exchange for regular payments (premiums). Insurers pool many policyholders’ risks so that the cost of losses is shared and more predictable. Common goals of insurance are to protect health, income, property, and survivors from large, unexpected expenses.
How insurance works
- You pay a premium to an insurer in exchange for coverage defined by a policy.
- When a covered loss occurs, the insurer pays up to the policy limits after any deductible you owe.
- Insurers use underwriting to assess risk and set premiums; factors can include age, location, claims history, health, and credit (where allowed).
- Regulators and industry bodies (for example, the National Association of Insurance Commissioners in the U.S.) set standards and oversee insurers.
Core policy components
- Premium: The price you pay (often monthly or annually) for the policy.
- Deductible: The amount you pay out of pocket before the insurer contributes. Higher deductibles usually mean lower premiums.
- Policy limit: The maximum the insurer will pay for a covered loss. Limits may be per claim, per period, or a lifetime maximum.
- Other cost-sharing: Copays and coinsurance are common in health plans and affect your out-of-pocket costs after the deductible.
Common types of insurance
- Health insurance
- Covers routine and emergency medical care; may include copays, coinsurance, and annual deductibles.
- Preventive services are often covered at no cost under many plans.
- Purchase options include employer plans, individual market plans, government programs (e.g., Medicare, Medicaid), and travel/short-term plans for trips abroad.
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If you expect frequent care or chronic conditions, a plan with a lower deductible may save money overall despite higher premiums.
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Homeowners and renters insurance
- Homeowners insurance protects the dwelling, other structures, and personal property from many perils (fire, theft, vandalism).
- Standard policies typically exclude floods and earthquakes; separate coverage is usually required for those perils.
- Renters insurance covers personal property and liability for tenants.
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Mortgage lenders often require homeowners insurance and may place coverage for you if you let a policy lapse.
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Auto insurance
- Pays for liability if you injure others or damage their property, and for repair/replacement of your vehicle depending on coverages purchased (collision, comprehensive).
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Minimum liability coverage is required in most jurisdictions; lenders or lessors typically require full coverage while a loan/lease is outstanding.
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Life insurance
- Pays a death benefit to named beneficiaries in exchange for ongoing premiums.
- Term life: coverage for a specified period (e.g., 10–20 years); generally lower cost.
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Permanent life (including whole and variable): coverage for life, often with a cash-value component that can grow over time.
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Travel insurance
- Covers trip cancellations, interruption, emergency medical care abroad, evacuation, and baggage loss/damage.
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Typical exclusions include claims related to certain high-risk activities, preexisting conditions, or some large-scale events (terms vary by policy).
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Specialty/business insurance
- Businesses and individuals can purchase specialized coverage (e.g., professional liability, business interruption, kidnap & ransom, identity theft, wedding liability). Requirements and options vary by industry and jurisdiction.
Why insurance matters
- Protects assets and income from unexpected, potentially catastrophic costs.
- Reduces the risk of financial ruin from medical bills, lawsuits, or property loss.
- Provides peace of mind and financial stability for you and your dependents.
- In many cases, coverage is required by law, lenders, or contract.
Is life insurance an asset?
- Permanent life insurance can build cash value and may be considered a financial asset because the policy can accumulate value or be converted to cash. Term life generally does not build cash value; it provides pure death-benefit protection for a set period.
Choosing the right coverage
- Assess your risks: health needs, property exposure, driving habits, family financial obligations, and business exposures.
- Compare premiums, deductibles, policy limits, exclusions, and endorsements.
- Check insurer financial strength, claims service, and customer reviews.
- Revisit coverage after major life changes: marriage, birth of a child, home purchase, career change, or significant asset acquisition.
Bottom line
Insurance shifts the financial burden of unpredictable losses from you to an insurer in exchange for a predictable cost (premium). Understanding premiums, deductibles, and policy limits—and matching coverage to your specific risks—helps you protect your finances and avoid costly surprises.