Insurance is a form of risk management, to protect from financial loss. But what does that mean?
Generally speaking, insurance is intended to provide people or companies protection from losing a large amount of money.
Part of the confusion is that there are so many types of insurance, from home owner’s to health.
Many common types of insurance fall into the category of property and casualty insurance. That includes home owner’s, renter’s and car insurance.
Property insurance covers stuff you own. Casualty insurance includes liability coverage to help protect you if you’re found responsible for an accident.
We delve further into health insurance here.
Basically, an insurance company offers a person or another company a policy where the insured pays a set amount on a regular basis in exchange for the insurance company providing a large payout in the event of a big loss.
The insured is the person or company taking out the insurance policy (on themselves or their own property). The policy is the contract between the insurance company and the person or other company. The amount the insured pays on a regular basis is called the premium.
One of the common types of insurance is car insurance. It is required by law in the US for drivers to have car insurance.
I pay a set amount monthly to my insurance company, say $150. In the event that I get into an accident or my car is stolen, they are supposed to cover the cost of fixing or replacing the current value of my car, minus my deductible.
The deductible is the amount the insured pays out of pocket before the insurance company covers the remainder of the cost. It’s how much you pay toward whatever the expense of repairing or replacing the car may be.
Renter’s insurance works similarly. As the insured, I give them a general list of items I own and their value. I pay a small amount monthly, like $10, and if something really bad happens, like someone steals your stuff or a water pipe breaks and ruins your insured belongings, they cover the cost of the replacement value of the items that were lost or ruined.