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What is insurance? / common types of insurance

 

What is insurance?

What is insurance? / common types of insurance



Insurance is a way to manage your risk. When you buy insurance, 

you purchase protection against unexpected financial losses. 


   The insurance company pays you or someone you choose if  something bad happens to you. If you have no insurance and an accident  happens, you may be responsible for all 

related costs. 


Having the right insurance for the risks you may face can make a big difference in your life.

An insurance policy is a written contract  between the policyholder (the person  or company that gets the policy) and the insurer (the insurance company). 


  The policyholder is not necessarily the insured. An individual or company may get an insurance policy (making them the policyholder) that protects another person or entity (who is the insured). For example, when a company buys life insurance for an 

employee, the employee is the insured, and the company is the policyholder.


The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured, or their designated beneficiary or assignee. 


  The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium. 

 

  If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. 

   

A mandatory out-of-pocket expense required by an insurance policy before an insurer will pay a claim is called a deductible (or if required by a health insurance policy, a copayment).


  The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary insurer deems the risk too large for it to carry.


How does insurance reduce your financial risk? 


Imagine you’re driving your car and you hit a deer, which damages your car. 

  If you have the right kind of auto insurance policy, the insurance company will pay the costs of the car repairs (minus the deductible — the portion you have to pay). 


 Now, imagine a water pipe bursts in your bathroom, ruining everything in that  room and in the bedroom next to it. Typically, if you have homeowner’s or renter’s  insurance, the insurance company will pay to replace some or all of the damaged property, once you pay your deductible. 

   Insurance policies will only pay for things that are described in the policy. So, it’s important to read a policy carefully before you buy it, so you’ll know exactly what’s covered.


How does an insurance policy work?


Insurance policies are often in place for a specific period of time. 

  This can be referred to as the policy term. At the end of that term, you need to renew the policy or buy a new one.


  When you buy an insurance policy, part of your responsibility includes paying a fee called a premium. 

   Some premiums are paid monthly, like health insurance. Others may be paid once or twice a year, like auto or homeowner’s insurance. 

    The cost of your premium generally depends on how much of a risk you are to the insurance company. 


   In addition to the premiums, most insurance policies include a 

deductible. 

  That’s the amount you have to pay first, before the insurance company pays their share. For example, if you have a $500 deductible on your homeowner’s policy and a storm 

causes $3,000 in damage, you will pay $500 and your insurance company will pay $2,500. 

With some policies, you can choose 

your deductible. Usually, a higher deductible means a lower  insurance premium.


What are common types of insurance?


  There are many types of insurance, but some common types are described here. 

Health insurance :-

Helps you pay for doctor fees and sometimes prescription drugs. 

  Once you buy health insurance coverage, you and your health insurer 

each agree to pay a part of your medical expenses — usually a certain dollar amount or percentage of the expenses.


Life insurance :-

Pays a person you select a set amount of money if or when you die. The money from your life insurance policy can help your family pay bills and cover living expenses. 


Disability insurance :-

Protects individuals and their families from financial hardship when illness or injury prevents them from earning a living. Many employers offer some form of disability coverage to employees, or you can buy an individual disability insurance policy. 


Auto insurance :-

Protects you from paying the full cost for vehicle repairs and medical expenses due to a collision. 

  In most states, the law requires you to have auto insurance when operating a motor vehicle.


Homeowner’s or renter’s insurance :-

Protects your home and personal property against damage or loss and insure you in case someone gets hurt while on your property. If you have a mortgage on your property, most lenders require you to have homeowner’s insurance as a condition of the loan. 


Closed community and governmental self-insurance :-

Some communities prefer to create virtual insurance among themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. 

  A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters strike. 

   The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. 

   In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In this manner the community can even out the extreme differences in insurability that exist among its members. 

   Some further justification is also provided by invoking the moral hazard of explicit insurance contracts.

    In the United Kingdom, The Crown (which, for practical purposes, meant the civil service) did not insure property such as government buildings. 

   If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. Since many UK government buildings have been sold to property companies and rented back, this arrangement is now less common.

In the United States, the most prevalent form of self-insurance is governmental risk management pools. They are self-funded cooperatives, operating as carriers of coverage for the majority of governmental entities today, such as county governments, municipalities, and school districts. Rather than these entities independently self-insure and risk bankruptcy from a large judgment or catastrophic loss, such governmental entities form a risk pool. 

  Such pools begin their operations by capitalization through member deposits or bond issuance. Coverage (such as general liability, auto liability, professional liability, workers compensation, and property) is offered by the pool to its members, similar to coverage offered by insurance companies. 

  However, self-insured pools offer members lower rates (due to not needing insurance brokers), increased benefits (such as loss prevention services) and subject matter expertise. Of approximately 91,000 distinct governmental entities operating in the United States, 75,000 are members of self-insured pools in various lines of coverage, forming approximately 500 pools. Although a relatively small corner of the insurance market, the annual contributions (self-insured premiums) to such pools have been estimated up to 17 billion dollars annually.


What should you consider when buying an  insurance policy?


A useful rule to live by is to do your homework before you buy insurance. Research  any insurance company you’re thinking about buying from to be sure that the company is financially sound and provides good service. 

  Also find out what factors matter so that you can get the coverage you need at the best price.


Topic Cover In This Post :- 

1. What is insurance ?

2. How does insurance reduce your financial risk? 

3. How does an insurance policy work?

4. What are common types of insurance?

5. What should you consider when buying an  insurance policy?


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