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What is 'Insurance'
Insurance is a
contract, represented by a policy, in which an individual or entity receives
financial protection or reimbursement against losses from an insurance company.
The company pools clients' risks to make payments more affordable for the
insured.
Insurance
policies are
used to hedge against the risk of financial losses, both big and small, that
may result from damage to the insured or her property, or from liability for
damage or injury caused to a third party.
BREAKING DOWN 'Insurance'
There are a multitude
of different types of insurance policies available, and virtually any
individuals or businesses can find an insurance company willing to insure them,
for a price. The most common types of personal insurance policies are auto, health,
homeowners and life insurance policies. Most individuals in the
Businesses require
special types of insurance policies that insure against specific types of risks
faced by the particular business. A fast food restaurant, for example, needs a
policy that covers damage or injury that occurs as a result of cooking with a
deep fryer. An auto dealer is not subject to this type of risk but does require
coverage for damage or injury that could occur during test drives. There are
also insurance policies available for very specific needs, such as kidnap and
ransom (K&R), medical malpractice and professional liability insurance,
also called errors and omissions insurance.
Insurance Policy Components
When choosing a
policy, it is important to understand how insurance works. Two of the most
important components of all insurance policies are the premium and the
deductible. A firm understanding of these two concepts goes a long way to
helping you choose the policy that is best for you.
A policy's premium is
simply its price, typically expressed as a monthly cost. The premium is
determined by the insurance company based on your, or your business', risk
profile. For example, if you own several expensive automobiles and have a
history of reckless driving, you pay more for an auto policy than someone with
a single mid-range sedan and a perfect record. However, different insurers may
charge different premiums for similar policies, so finding the price that is right
for you requires some legwork.
The second important
policy component is the deductible. Whenever you make a claim, you are required
to meet a minimum out-of-pocket expense, or deductible,
before the insurance company pays for your losses. Deductibles can apply
per-policy or per-claim depending on the insurer
and the type of policy.
Policies with very
high deductibles are typically cheaper because the high out-of-pocket cost
means insureds are less likely to make small claims. When it comes to health
insurance, for example, people who have chronic health issues or need regular
medical attention should look for policies with lower deductibles. Though the
annual premium is higher than a comparable policy with a higher deductible,
cheaper access to medical care throughout the year may be worth the trade-off.
