What is insurance? – Detailed Explanation
Insurance is medium to manage your financial risk. Life is very uncertain, so there may be a possibility that you have to face unexpected financial losses in your life.
That’s why Insurance is a way to protect your financial losses. If something unexpected or bad happens to you or your belongings the Insurance company will pay you for your losses.
For example, If you met with an accident, and you don’t have Insurance then you have to pay for all the related costs like a car or bike repair, Hospital charges, or in case if you lose your life then your family members would go through all crises.
So that’s why Insurance is very important, whether it is Life Insurance, Health Insurance or car Insurance, etc.
Many people also buy insurance to pay regular expenses like annual medical checkups, dental visits, etc, and not only for unexpected risk events. there is also discount coupons for insurance policyholders at Hospitals.
Table of Contents
What is mean by insurance policy?
An Insurance Policy is the legal and written contract between a person or company who get insurance (Policy Holder) and the Insurance company which provide the insurance (Insurer).
Sometimes Policyholder is not necessarily the beneficiary, for example, if Xyz company buys Insurance for their employee then Company is the policyholder and the employee is the beneficiary.
How does insurance reduce your financial risk?
Imagine you’re driving a car and you hit to tree on the divider, So if you have the best car insurance then the Insurance company will pay for your car repair ( There are also deductible charges which you have to pay)
Now imagine, your house catches fire due to Short-Circuit or Gas leak, and everything in the house gets ruined including Sofaseat, bed, TV, Refrigerator, etc. But if you have good Home content Insurance or Homeowner’s Insurance then the cost of this disaster will also get covered even if you’re living in a rented house.
How does an insurance policy work?
Insurance policies are generally for a specific period of time. It is called as a ‘Policy Term’. and the end of the Term you have to Buy a new Policy or needs to Renew it.
When you buy Insurance you have to pay for Premium which is part of your responsibility.
Some Insurance policies include Monthly paid premiums, on in Some Policies It should be paid yearly or twice a year.
The costs of these premiums will depend upon the risks you are to the Insurance company provider.
Some Insurance Policies also include Deductibles which are the amount that you have to pay first before the Insurance company when any Disaster happens.
For example, If your deductible is 2000 and the damage that happened to your car is 10,000, then the company will pay 8000 after you pay 2000.
The higher the deductible means lower the premium.
What are the types of insurance?
There are so many types of Insurance but here we included some common types of Insurance :
Health Insurance :
- Health insurance includes the coverage of your Medical expenses.
- It will cover your Doctor’s Fee and in some cases also the costs of Prescribed drugs.
- It is very helpful in case, you get any medical emergency and do not have enough money to pay for your hospital charges.
Life Insurance :
- In Life Insurance the beneficial amount of your insurance goes to your heir.
- Life insurance includes a set of amount of money(which is decided by the premiums you pay), which goes to your beneficiary when you die.
- This money will help your family to pay bills and to cover living expenses after you.
- There are two types of Life Insurance, In the first one, beneficiary got money if a person dies during the term of the policy (from 1 to 30 years)
- And the second one is whole life insurance in which whenever a person dies the beneficiary will get money.
Auto Insurance :
- This insurance will cover your expenses on your vehicle repair
- It will also include medical expenses due to the accident.
- In India, It is compulsory to have Vehicle Insurance in most states.
Homeowner’s Insurance :
- This Insurance policy will cover your Home and home belongings, which also includes events of loss or theft.
- It will help you to pay for repairs or replacements.
- If you mortgage on your property, Most lenders require Homeowner’s insurance.
- Even If you are renting a property, the landlord might require renter’s Insurance.
Article Source: files.consumerfinance.gov
