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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.

Understanding How Insurance Works

There is a multitude of different types of insurance policies available, and virtually any individual or business 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. Most individuals in the United States have at least one of these types of insurance, and car insurance is required by law.


Businesses require special types of insurance policies that insure against specific types of risks faced by a particular business. For example, a fast food restaurant 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.


Insurance Policy Components

When choosing a policy, it is important to understand how insurance works.

[Important: Three crucial components of insurance policies are the premium, policy limit, and deductible.]


A firm understanding of these concepts goes a long way in helping you choose the policy that best suits your needs.
PERSONAL FINANCE  INSURANCE


Insurance

REVIEWED BY JULIA KAGAN




 Updated Jun 12, 2019

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.




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Insurance

Understanding How Insurance Works

There is a multitude of different types of insurance policies available, and virtually any individual or business 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. Most individuals in the United States have at least one of these types of insurance, and car insurance is required by law.


Businesses require special types of insurance policies that insure against specific types of risks faced by a particular business. For example, a fast food restaurant 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 known as errors and omissions insurance.

Insurance Policy Components


When choosing a policy, it is important to understand how insurance works.

[Important: Three crucial components of insurance policies are the premium, policy limit, and deductible.]

A firm understanding of these concepts goes a long way in helping you choose the policy that best suits your needs.

Premium


A policy's premium is its price, typically expressed as a monthly cost. The premium is determined by the insurer based on your or your business's risk profile, which may include creditworthiness. For example, if you own several expensive automobiles and have a history of reckless driving, you will likely pay more for an auto policy than someone with a sin