What is 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.
People get insurance not only to help with
risks from unexpected events but also to
help pay for routine things, such as annual
medical checkups and dental visits. In addition, insurance companies negotiate
discounts with health care providers, so their customers pay those discounted rates.
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.
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.
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