With insurance you pay to be protected from specially defined financial loss, as described in a written policy document.
So you pay them every year (or month etc), and if something bad happens then they pay you a large sum of money!
But the policy document will have many rules saying under what conditions they will or will not pay, and how much they will pay. It can be very long and should be read carefully.
Example: Homeowners' Insurance
You pay them $2,000 a year, and if your house is damaged they will pay to have it fixed.
But rules might include "like for like replacement" (they won't pay for upgrades) or "not due to flooding" (if you are in a flood prone area) that protect them from certain payouts.
Major types of insurance include:
- Health: Covers some medical costs if you need them, such as hospital costs.
- Liability: Protects you from others’ claims of loss due to your negligence or improper actions.
- Auto: Provides liability and property damage coverage under some conditions.
- Disability: Replaces part of your income lost if you cannot work because of illness or injury.
- Homeowners: Gives property damage under specific conditions.
- Long-term care: Covers specific costs of care in a nursing facility or at home.
- Life: Gives money to your dependents if you die. Special rules apply.
Insurance is a really good thing, it can save you from bad situations, but make sure you understand what you are paying for.
What to Insure
Insure what you can't afford not to insure.
Does that sound weird? Maybe some examples will help:
- You can afford bread, so no need to insure that!
- You can afford a new microwave, so no need to insure that, either.
- But you can't afford to replace your car, so do insure it.
So think about the really costly things that might happen, and insure against those.
Example: Your Car is Really Cheap
So you can easily repair or replace it with a similar one.
So no need to insure it, right?
But what if your car damages a Mercedes and they want $20,000 in repairs?
That is Liability Insurance, so maybe you need to look at that.
Insurance is a really good thing, it can save you from bad situations. But make sure you understand what you are paying for.