What is insurance? Types of insurance, and why do you need one?

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With a good Insurance policy, the insurance company promises to pay for certain losses, damages, sickness, or deaths in exchange. Insurance is a contract, usually shown by a policy, in which the user agrees to pay a certain fee to an insurance company or the state. It’s a way to protect your finances and handle risks. It protects you from unpredictable losses, damages, or injuries, empowering you to manage risks and control your financial future.

The company responsible for providing insurance is known as an insurance company or, for short, an Insurer. The one seeking to be insured is called a policyholder, which is the person who buys the insurance policy. The policy covers the organisation, person, or product, referred to as the Insured, the entity protected by the insurance policy.

In exchange for this payment, the insurer promises to pay the insured if a loss covered by the policy happens. Even though this loss is not only a financial one, it must be measurable in money. Also, the insurance deal usually involves something in which the covered has an insurable stake, shown by ownership, possession, or a relationship already in place. 

This differentiates insurance from gambling; whatever is being insured must have a direct link with the policyholder. For example, you cannot insure your neighbour’s house or cars because, in the case of damage, you do not have anything to lose in that accident. This financial security is a crucial benefit of insurance, providing reassurance about your financial stability.

Various  Insurance Types

Health Insurance

A health insurance policy caters for a person’s medical expenses. Although the federal government used to require every citizen of the United States to obtain health insurance, the situation has changed. Although in the past, the federal government required every citizen of the US to get health insurance, the case is different now. Health insurance usually covers from simple preventive health care to serious surgical procedures. However, this is determined by the health care plan the policyholder is running on. There are many different kinds of insurance plans for health care, such as Health Maintenance Organisation (HMO), High Deductible Health Plans (HDHPs), Preferred Provider Organisation (PPO) and Point of Service (POS),  which are mostly paired with Health Savings Accounts (HSAs).

In short, healthcare insurance is a great way to invest in your health by committing a portion of your income to the security of your health before, during or after any health crisis.

Benefits of Healthcare Insurance

  • Financial security: It pays for medical bills, which can be significant and unexpected.
  • Access to Care: This usually gives you access to a group of healthcare providers and services.
  • Preventive Care: It promotes preventive measures and early illness detection, which could lower long-term healthcare costs.

Home Insurance

Home insurance, also called “homeowners insurance,” protects your house, buildings on your land, and properties in the event of accidents, natural disasters, theft, or abuse. When the policyholder is the landlord, the insurance does not cover the personal property of any tenant living on-site.

Renter’s insurance is another type of safety that goes along with this- protecting the tenant who lives in an apartment. This usually covers personal property expenses if a part of the building is damaged. Rental insurance is not a legal requirement, although some landlords demand proof of renter’s insurance before handing the rented property to the tenant.  

Note – Rental Insurance doesn’t cover floods or earthquakes.

Benefits of Home Insurance

  • Protects your home and properties from damage caused by natural disasters, theft, or accidents.
  • Liability Coverage: This protects you from legal cases if someone gets hurt on your property.
  • Peace of Mind: It gives you peace of mind that your most significant investment, your home, is safe.

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Mortgage Insurance

Private mortgage insurance (PMI) or mortgage insurance safeguards mortgage brokers from financial loss in the event of a borrower default. When obtaining a traditional loan, if the down payment is less than 20%, the borrower is always required to purchase private mortgage insurance (PMI). After a set amount of the mortgage has been paid back, the PMI payments will be cancelled. FHA and USDA loan borrowers with down payments of less than 20% are frequently required to pay mortgage insurance premiums (MIP), which are generally non-cancellable.

Benefits of Mortgage Insurance

  • Approval for a Loan: This lets you get an apartment loan with less of a down payment.
  • Lowering the risk: This keeps lenders from losing money if a borrower doesn’t pay back the loan.

Auto Insurance

Auto insurance is another type of insurance policy; it helps a car owner pay for repairs in the case of a vehicle accident (the vehicle in question has to be the insured vehicle). The beautiful part of auto insurance is that it also covers any financial claims if the insured automobile damages someone else’s property in the case of a car accident. 

Instead of spending your own money on auto accidents and damage, people subscribe to insurance premiums from an auto insurance company. The company then pays for most of the repair expenses associated with an auto accident or other vehicle damage.

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Benefits of Auto Insurance

  • Accident coverage on your vehicle insurance pays to fix your car and the other person’s property if you were at fault.
  • Medical Expenses: This covers medical expenses for injuries in the event of an auto accident.
  • Legal Requirements: Most places require it by law, making sure you follow the law. 

Life Insurance

A Life insurance policy comes into effect after the death of the policyholder.  With premium payments continuing throughout your lifetime, your beneficiaries (often a surviving close relative) get a payout from your life insurance policy. Another category of life insurance exists, which is called Term life insurance. It protects a specified time frame, mostly between 10 and 20 years. In the event of your untimely death within that time, the organisation will compensate the recognised family left behind. As long as you keep paying your payments, your permanent life insurance policy will last as long as you do.

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Benefits of Life Insurance

  • Trip Cancellation: This covers the costs of cancelling or shortening a trip.
  • Medical Emergencies: This covers medical emergencies that happen while you’re travelling.
  • Loss of Luggage: Makes up for damage or missing luggage, which eases travel stress.

Travel Insurance

Travel insurance covers the expenses and losses associated with travelling. These include trip interruptions or postponements, coverage for immediate medical care, injuries and forced evacuations, destroyed luggage, rental vehicles, and rental houses.

Benefits of Travel Insurance

  • Cancellation of a Trip: This covers the costs of cancelling or interrupting a trip.
  • Medical Emergencies: This plan covers medical emergencies that happen while you’re travelling.
  • Loss Luggage: Pays for lost or damaged luggage, which makes travelling less stressful.

Is Insurance a worthy investment?

Yes, insurance is a good investment for many reasons. Here are some of the reasons why insurance is essential and what each type of coverage can do for you: 

  • Risk Management: Insurance allows you to lessen the financial risks associated with unplanned events, such as health problems and property damage.
  • Financial security: It gives you a safety net so that unexpected costs don’t put you in a tough financial spot.
  • Peace of Mind: Being protected against significant losses makes you feel better about your life and lets you focus on other essential things.
  • Legal and social duties: certain kinds of insurance, like auto and mortgage insurance, are needed by law or lenders, so it’s essential to have them.

The premiums for insurance appear like an extra cost, but they are accommodating in times of trouble because they protect you and keep your finances stable. Making sure you have the right kinds of insurance for your needs can protect your finances and give you peace of mind.