Understanding Your Insurance

Insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

Insurance policies hedge against financial losses resulting from accidents, injury, or property damage. Insurance also helps cover costs associated with liability (legal responsibility) for damage or injury caused to a third party.

How It Works

Many policy types are available, and virtually any individual or business can find an insurance company willing to insure them—for a price. Common personal insurance policy types are auto, health, homeowners, and life insurance. Most individuals in the United States have at least one of these types of insurance, and car insurance is required by state law.

Businesses obtain insurance policies for field-specific risks, For example, a fast-food restaurant’s policy may cover an employee’s injuries from cooking with a deep fryer. Medical malpractice insurance covers injury- or death-related liability claims resulting from the health care provider’s negligence or malpractice. A company may use an insurance broker of record to help them manage the policies of its employees. Businesses may be required by state law to buy specific insurance coverage.


There are many different types. Let’s look at the most important.

Health Insurance

It helps cover routine and emergency medical care costs, often with the option to add vision and dental services separately. In addition to an annual deductible, you may also pay copays and coinsurance, which are your fixed payments or percentage of a covered medical benefit after meeting the deductible. However, many preventive services may be covered for free before these are met.

The federal government no longer requires Americans to have health insurance, but in some states, such as California, you may pay a tax penalty if you don’t have it.

Home Insurance

Homeowners insurance protects your home, other property structures, and personal possessions against natural disasters, unexpected damage, theft, and vandalism.

It won’t cover floods or earthquakes, which you’ll have to protect against separately.

Your lender or landlord will likely require you to have homeowner’s coverage. Where homes are concerned, you don’t have coverage or stop paying your bill; your mortgage lender is allowed to buy homeowners insurance for you and charge you for it.

Auto Insurance

 Can help pay claims If you injure or damage someone else’s property in a car accident, help pay for accident-related repairs on your vehicle, or repair or replace your vehicle if it is stolen, vandalized, or damaged by a natural disaster.

Instead of paying out of pocket for auto accidents and damage, people pay annual premiums to an auto insurance company. The company then pays all or most of the covered costs associated with an auto accident or other vehicle damage.

If you have a leased vehicle or borrowed money to buy a car, your lender or leasing dealership will likely require you to carry auto insurance.

Life Insurance

A life insurance policy guarantees that the insurer pays a sum of money to your beneficiaries (such as a spouse or children) if you die. In exchange, you pay premiums during your lifetime.

There are two main types. Term life covers you for a specific period, such as 10 to 20 years. If you die during that period, your beneficiaries will receive a payment. Permanent life covers your whole life as long as you continue paying the premiums.

Travel Insurance

It covers the costs and losses associated with traveling, including trip cancellations or delays, coverage for emergency healthcare, injuries and evacuations, damaged baggage, rental cars, and rental homes.

Why is it important?

It helps protect you, your family, and your assets. An insurer will help you cover the costs of unexpected and routine medical bills or hospitalization, accident damage to your car or injury to others, and home damage or theft of your belongings. It can even provide your survivors with a lump-sum cash payment if you die. In short, insurance can offer peace of mind regarding unforeseen financial risks.

Is insurance an asset?

Depending on the type of life insurance policy and how it is used, permanent or variable life insurance could be considered a financial asset because it can build cash value or be converted into cash. Simply put, most permanent life insurance policies have the ability to build cash value over time.

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