What is Insurance? Its Definition, Types, and Benefits

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Life is full of risks. Health risks, destruction, and losing what we have are some of those risks. All these risks will cause you to suffer from financial losses. Fortunately, you can minimize or prevent monetary losses by having insurance. What is insurance? How does it protect you from all the risks?

Many of you may already have a couple of insurance policies. However, have you ever wondered what insurance is? Keep reading if you want to understand more about insurance.

What is Insurance?

What is insurance? Insurance is a legal agreement between the insurer and the insured. The insurer is the insurance company. It offers financial coverage for monetary losses the insured (policyholder) may suffer under particular conditions.

Insurance coverage is a contract of financial protection policy that covers a person’s financial risks caused by unpredictable contingencies. The insurer must pay a monthly premium to the insurance company in return for this protection.

So, what is insurance? It is a financial safety net. It will protect you and your family from financial losses. It will help you recover financially after car accidents, fires, thefts, and unpredictable contingencies.

Therefore, if you have insurance policies, you don’t need to worry about particular financial losses. When you or your loved ones suffer from unpredictable contingencies, you can file claims to the insurance company so the company will pay for the losses.

Components in Insurance Policy

An insurance policy consists of several components. The main components of any insurance type are as follows.

1. Deductible

A deductible is an amount the insured members must pay before the insurance company pays a claim. It serves as a preventer of large volumes of insignificant and small claims.

Some insurers require the insured to pay a deductible per policy, but others may ask you to pay it per claim.

2. Policy Limit

What is insurance policy limit? It is the maximum amount that an insurance company will pay for covered losses. Different insurance policies have different policy limits and regulations.

Some of them have higher policy limits than others. However, typically you must pay higher monthly premiums to get a higher limit. In addition, the maximum limits may be set per particular period, such as over the life of the policy, per year, per injury, or loss.

3.  Premium

What is insurance premium? It is the price of the insurance policy. Insured members typically pay it monthly. The amount of premiums you must pay depends on several things. One of them is the risk profile of the policyholder.

For example, a healthy policyholder will pay a lower health insurance premium than the policyholders with particular medical conditions pay. Moreover, a car owner with a history of reckless driving will pay a higher car insurance premium.

Insurance Types

Insurance companies offer different types of insurance to meet the needs of insured members. Below are some of them.

1. Health Care Insurance

What is health care insurance? It is insurance that covers the medical expenses of the insured members.

Different health insurance plans cover different arrays of ailments and diseases. Some health insurance plans cover specific illnesses, such as cancer, but others may not.

2. Life Insurance

Life insurance offers financial benefits for the beneficiary of the insured member. When the insured member dies, the insurer will pay a certain amount of money to his beneficiary in exchange for the premium he has paid to the insurer.

Particular life insurance plans only pay lump cash payments to the beneficiary. Other insurance plans also cover funeral costs and burial costs, and other final expenses.

3. Car Insurance

What is car insurance? It is insurance that covers financial losses in case your car is stolen, damaged by natural disasters, vandalized, or you’re involved in a car accident.

Some car insurance plans cover more than those risks. They also cover third-party liability. Therefore, if your car accident involves other cars, you don’t need to pay the damage to those cars’ owners because the insurer pays it to them.

4. Home Insurance

This type of insurance protects your possession and home against theft, fire, and damage.  Some home insurance plans cover property damage due to earthquakes and floods.

However, most insurers do not offer these coverages to properties located in earthquake-prone and flood-prone areas. Therefore, policyholders in those areas must purchase these earthquake and flood coverage separately if they need coverage for these disasters.

In addition, other plans include legal responsibility and liability for property damage or injuries caused by the household members.

5. Disability Income Insurance

This type of insurance provides income to the insured member who can no longer work due to illness, injury, or disability. Disability income insurance is typically available through employers. It may cover short-term disability and long-term disability.

6. Travel Insurance

Travel insurance covers losses and costs associated with travel. You must have this insurance if you plan to travel domestically and abroad.

Benefits of Having Insurance

Purchasing insurance policies will give you some benefits. The benefit you get, of course, depends on the type of insurance you have. In general, insurance will give you peace of mind. Therefore, you will have fewer things to worry about in your life.

By purchasing insurance policies, you don’t need to worry about car damage and property damage because the insurer will cover the cost of fixing your car and property. In addition, insurance will free you from medical expenses and other expenses.

How to Choose an Insurance Provider

However, you cannot get the insurance benefits above if you work with the wrong insurance company. Therefore, it is essential to purchasing insurance policies from a well-established insurer. You can do several things below to ensure that you purchase the policies from the right provider.

  • Check the insurance company’s financial strength to ensure that the company can pay your claims in the future.
  • Check insurance companies’ reviews so you know which one is best.
  • Compare coverages and premiums of insurance products from different providers. Therefore, you can get one that offers the best coverage at a competitive price.
  • Find out whether the providers offer value-added benefits for the policy members or not.

What is insurance? It is financial protection provided by insurance companies. This financial protection is handy when you suddenly suffer from unpredictable financial losses. Therefore, everyone needs to have at least one insurance policy.

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