What Is Insurance?

Insurance is a contract between you and an insurance company. In exchange for paying a regular amount of money (called a premium), the insurance company agrees to help cover certain financial losses if a covered event happens.

For example:

• Auto insurance helps cover car accident costs.

• Health insurance helps cover medical bills.

• Home insurance helps cover property damage.

• Life insurance provides money to your family if you pass away.

Insurance spreads financial risk across many people. Everyone pays premiums, and the insurance company uses that pooled money to pay claims for those who experience covered losses.

How Does Insurance Work?

Insurance works by transferring risk.

Instead of personally paying the full cost of a large, unexpected event, you share the risk with the insurance company.

Here is how the process typically works:

1. You purchase a policy.

2. You pay a premium (monthly or annually).

3. A covered event occurs.

4. You file a claim.

5. The insurance company reviews the claim.

6. The company pays according to your policy terms.

Not every event is covered. Policies clearly outline what is included and excluded.

What Is a Premium?

A premium is the amount you pay for your insurance coverage.

Premiums can be:

• Monthly

• Quarterly

• Annually

The cost of your premium depends on factors such as:

• Age

• Location

• Type of coverage

• Coverage limits

• Deductible amount

• Risk level

For example, younger drivers often pay higher auto insurance premiums because they are statistically considered higher risk.

What Is a Deductible?

A deductible is the amount you pay out of pocket before your insurance coverage begins to pay.

Example:

If you have a $1,000 deductible and experience $5,000 in covered damage:

• You pay the first $1,000.

• The insurance company pays the remaining $4,000.

Higher deductibles usually lower your premium. Lower deductibles usually increase your premium.

Choosing the right deductible depends on your financial comfort level.

What Are Coverage Limits?

Coverage limits are the maximum amounts an insurance company will pay for a covered claim.

For example:

• An auto policy may have a $100,000 liability limit.

• A homeowners policy may cover $250,000 for the dwelling.

• A health plan may have out-of-pocket maximum limits.

If your damages exceed your coverage limits, you may be responsible for the remaining costs.

This is why selecting appropriate coverage limits is important.

What Is a Claim?

A claim is a formal request you submit to your insurance company asking for payment under your policy.

When filing a claim:

• Provide accurate details.

• Submit documentation.

• Follow policy instructions.

The insurance company may investigate to confirm the event is covered under your policy terms.

Why Insurance Is Important

Without insurance, one serious event could create major financial hardship.

Insurance helps:

• Protect your savings.

• Reduce financial uncertainty.

• Provide peace of mind.

• Support your family’s financial stability.

While you hope to never need to use it, insurance acts as a financial safety net.

Common Types of Insurance Explained

Here are some of the most common types of insurance people consider:

Auto Insurance

Helps cover accident damage, liability claims, and vehicle repairs.

Health Insurance

Helps pay for doctor visits, hospital stays, prescriptions, and medical treatments.

Life Insurance

Provides financial support to your beneficiaries after your death.

Homeowners Insurance

Protects your home and belongings from damage or theft.

Renters Insurance

Covers personal belongings and liability inside a rental property.

Disability Insurance

Provides income replacement if you cannot work due to illness or injury.

Travel Insurance

Helps cover trip cancellations, travel interruptions, or emergency medical expenses abroad.

Pet Insurance

Helps cover veterinary costs for your pet’s illnesses or injuries.

Final Thoughts: Start With Understanding

Insurance does not need to feel complicated. Once you understand premiums, deductibles, coverage limits, and claims, policies become much easier to evaluate.

If you are ready to explore specific types of coverage, browse our guides below to learn more about each category in detail.

How to Choose the Right Insurance Coverage

When evaluating insurance, ask yourself:

• What financial risks do I face?

• Could I afford to pay for this loss on my own?

• How much coverage would protect my savings?

• What deductible feels manageable?

Insurance should match your personal financial situation and comfort level.

Frequently asked questions About Insurance

What is the most important type of insurance to have?

Health insurance and auto insurance (if you drive) are often considered essential forms of protection.

Why do premiums increase?

Premiums may increase due to inflation, claims history, or changes in risk factors.

Is insurance required by law?

Certain types, like auto insurance, are required in most states. Others are optional but recommended.

Can I have multiple insurance policies?

Yes. Many people carry multiple policies for different risks.