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What is Insurance
Insurance is a contract, represented by a policy, in which an
individual or entity 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 are used to hedge
against the risk of financial losses, both big and small, that may
result from damage to the insured or her property, or from liability for
damage or injury caused to a third party.
Why Insurance
There are a multitude of different types of insurance policies
available, and virtually any individuals or businesses can find an
insurance company willing to insure them, for a price. The most common
types of personal insurance policies are auto, health, homeowners and life insurance policies. Most individuals in the United States have at least one of these types of insurance.
Also Read: How to make money from Insurance
Businesses require special types of insurance policies that insure
against specific types of risks faced by the particular business. A fast
food restaurant, for example, needs a policy that covers damage or
injury that occurs as a result of cooking with a deep fryer. An auto
dealer is not subject to this type of risk but does require coverage for
damage or injury that could occur during test drives. There are also
insurance policies available for very specific needs, such as kidnap and
ransom (K&R), medical malpractice and professional liability insurance, also called errors and omissions insurance.
The Components of Insurance Policy
When choosing a policy, it is important to understand how insurance
works. Two of the most important components of all insurance policies
are the premium
and the deductible. A firm understanding of these two concepts goes a
long way to helping you choose the policy that is best for you.
A policy's premium is simply its price, typically expressed as a monthly cost. The premium is determined by the insurance company based on your, or your business', risk profile. For example, if you own several expensive automobiles and have a history of reckless driving, you pay more for an auto policy than someone with a single mid-range sedan and a perfect record. However, different insurers may charge different premiums for similar policies, so finding the price that is right for you requires some legwork.
The second important policy component is the deductible. Whenever you make a claim, you are required to meet a minimum out-of-pocket expense, or deductible, before the insurance company pays for your losses. Deductibles can apply per-policy or per-claim depending on the insurer and the type of policy.
Policies with very high deductibles are typically cheaper because the
high out-of-pocket cost means insureds are less likely to make small
claims. When it comes to health insurance,
for example, people who have chronic health issues or need regular
medical attention should look for policies with lower deductibles.
Though the annual premium is higher than a comparable policy with a
higher deductible, cheaper access to medical care throughout the year
may be worth the trade-off.