What is insurance?

Home floods, car accidents, and emergency room visits are costly events that can happen to any one of us. But what if there was a way to have those costs covered if they were to happen? There is, and it is called insurance!

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Insurance is a way to protect yourself from financial loss. Simply put, insurance works by pooling together funds from many different people and paying out claims to those who file them.

Insurance companies collect premiums from their policyholders which are monthly payments that policyholders pay for coverage. As premiums are paid, the insurance company can build up cash reserves. In the event that a policyholder files an insurance claim, which is a formal request for a payment, the company will send the payment from the cash reserves.

Insurance companies stay in business by keeping total claim payout amounts below their cash reserves. If an insurance company’s claims are valued higher than their cash reserves, it could face bankruptcy.

Another key component of insurance is a deductible. Deductibles are the portion of a claim that the policyholder must pay out of pocket. A higher deductible will lower a policyholder’s insurance premium while a lower deductible will increase a policyholder’s insurance premium.

If someone believes that they will use insurance a lot, it may make sense to choose coverage with a lower deductible and higher premium because out-of-pocket costs will be less than high deductible coverage.

There are five main types of insurance: life, health, property, business, and car.

Life insurance is a type of insurance that pays out a benefit to beneficiaries when the policyholder passes away. During their lifetime, the policyholder makes regular monthly premium payments for their policy. This type of insurance can help beneficiaries cover funeral costs and lost income when the policyholder is no longer alive.

Health insurance is a type of insurance that covers medical and health expenses. This type of insurance is offered by major insurance carriers like United Healthcare and Cigna and may be offered by the government.

Property insurance is a type of insurance that covers damage to property. For example, if a house basement floods, the homeowner can file a claim and receive payment from the insurance company to have it repaired.

Business insurance is a type of insurance that protects a business from liability. Most businesses have insurance to protect themselves from product defects, lawsuits, and natural disasters. In fact, certain businesses such as doctor’s offices and hospitals may require malpractice insurance which protects from medical mistakes.

Car insurance is a type of insurance that protects a driver from liability. In the event that a car accident occurs, the insurance company will pay to have the car replaced or repaired.

Insurance is a useful tool to protect yourself and your loved ones from unforeseen events. When shopping for an insurance policy, it is important to receive multiple quotes and compare prices and coverage!