Insurance is an important way of protection against financial loss. It’s a kind of risk management, mostly used to mitigate the potential risk of some future contingent or uncertain future expense. Insurance coverage, whether it’s an auto insurance policy or a homeowners insurance policy or a life insurance policy, serves as assurance for policyholders that they’ll be able to get their money back or replacement cost if something happens to their property or person. In other words, insurance is a way to spread risk.
Insurance in the broad sense can be thought of as a contract between a insurer and an insured, promising the insurer (the one who pays the premium) that in the event of a financial loss, the insured will make up for it by paying a specified amount of money to the insurer. The insured pays premiums to the insurance company, which then pays the insured a sum of money called an excess. The insurance company keeps a portion of this surplus, which it distributes among policyholders periodically. There are two main kinds of insurance policies: risk-based and value-based. In the case of risk-based policies, the premium is determined solely by the insurer; in the case of value-based policies, the premium is based on the insured’s past financial losses and the value of the insured’s future earning capacity.
Most people have a general idea of what a policyholder is. The person who insures his car to the insurance company is the insured, while the person who insures his house to the insurance company is the policyholder. In a risk-based policy, the insured person is the policyholder, while in a value-based policy, the insured person is the insurer.
One kind of insurance that almost everyone has some kind of relationship with is auto insurance. Automobile insurance policies pay for the damages an insured causes in an accident and his legal responsibilities towards other drivers and automobiles. Policy limits are the maximum amount that the insurer will settle with a policyholder for a single claim, and these limits vary from insurer to insurer. Policy limits also dictate the amount of money that an insurer will pay out to the policyholder if he or she is injured or killed in a car accident.
Life insurance is another type of insurance that most people have an intimate knowledge of. Life insurance provides a policyholder with a lump sum of money if he or she dies during a specified period of time. It does not pay any dividends, and policyholders must be within a specified age range. A typical life insurance policy limits the amount of death benefits that an insured person can receive.
Home owner’s insurance is yet another kind of insurance that almost everybody knows about. Home owner’s insurance protects the house and its contents from damage due to fire, weather, earthquakes, and similar events. Premiums for home owner’s insurance are the same as for other types of insurance, and policyholders must meet the company’s requirements to purchase them. In order to get lower rates on home owner’s insurance premiums, some people try to downsize, forgo extensive coverage, or go with a company that does not use risky kinds of insurance. Whatever the case may be, all insurance policies have premiums, and everyone must pay them.