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What is insurance?

A heart-stopping car accident. A devastating natural disaster. A painful trip to the emergency room.

what_is_insurance

Most of us have experienced some kind of unexpected catastrophe that makes for interesting conversation — but also turns into financial hardship.

Although you can’t prevent all tragedies from occurring, there is a way to reduce or eliminate the negative affect they can have on your finances: insurance.

Insurance is a contract between you (the policyholder) and an insurance company (or carrier) that protects you against different types of potential financial losses up to certain dollar amounts.

Many types of insurance are sold, but the most common are auto, health, home and life:

• Auto insurance protects you if you get into an accident. It covers vehicle damage, theft, physical injuries and liability if you get sued.
• Health insurance protects you against the financial burden of high medical bills if you get sick or need to go to the emergency room.
• Home insurance protects you from the cost of rebuilding your home if it’s damaged or destroyed. It also covers your belongings if they’re damaged or stolen. Plus, it offers liability protection if someone gets hurt while they’re on your property.
• Life insurance protects those who depend on your income. It pays one or more beneficiaries — such as a spouse, child or partner — a specified sum of money if you die.

Auto insurance protects you if you get into an accident. It covers vehicle damage, theft, physical injuries and liability if you get sued.

• Health insurance protects you against the financial burden of high medical bills if you get sick or need to go to the emergency room.

• Home insurance protects you from the cost of rebuilding your home if it’s damaged or destroyed. It also covers your belongings if they’re damaged or stolen. Plus, it offers liability protection if someone gets hurt while they’re on your property.

• Life insurance protects those who depend on your income. It pays one or more beneficiaries — such as a spouse, child or partner — a specified sum of money if you die.

How insurance works

When you buy insurance, be sure that you understand exactly what’s covered. If something happens that isn’t covered by your policy, you’ll be in a pickle.

For instance, home insurance typically doesn’t cover flood damage. Flood insurance primarily is sold as a separate policy through the National Flood Insurance Program.

When you buy an insurance policy, the amount you’re charged is called a premium. For home insurance, the average annual premium in 2010 was $909, according to the National Association of Insurance Commissioners.

It’s critical that you pay your insurance premium on time so you’ll be covered for losses and you aren’t “naked” if something unexpected happens.

How to file an insurance claim

When a covered event occurs — like driving through a storm and getting pummeled with golf-ball-size hail — you can file a claim with your insurance company to collect payment.

However, with some policies, you may be required to pay a deductible first. A deductible is the amount of money that must be paid out of pocket before you receive insurance benefits. For instance, if you have a $1,000 health insurance deductible, you must pay $1,000 before your health coverage kicks in.

How much insurance do you need?

Whether you buy insurance and how much you buy is mostly up to you. However, some types of coverage are required in certain situations.

For example, most states require drivers to have a minimum amount of car insurance. Most mortgage lenders require homeowners to have home insurance. And beginning in 2014, the federal health care reform law will require most U.S. citizens to have health insurance or pay a penalty.

Insurance is an important financial product that protects your hard-earned income and assets. When shopping for policies, be sure to compare quotes from several insurers so you get the best coverage and customer service for your money.

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