What Is Insurance?
Whether you own a car, home, or think you might need medical care at some point, almost everyone in the U.S. will have to obtain some kind of insurance at some point in their lives. But what is insurance, and how does it work? Generally speaking, an insurance policy is a contract between you and your insurance company. In exchange for paying your premiums and abiding by the terms of the contract, the insurance company agrees to provide certain benefits – often covering some of the costs associated with certain types of misfortune or shielding you from certain types of liability. There are many types of insurance, and each state regulates the insurance industry within its borders.
How Does Insurance Work?
Insurance has a number of essential parts that make the whole system work. These include the following:
- Premiums: Insurance companies collect premiums from everyone they insure (called “insureds”), which provides the revenue they need to be able to pay for the benefits they provide.
- Exclusions: Each insurance policy will list the things that are covered by that policy. Normally, anything not listed is not covered, but most policies also list certain exclusions – risks that are specifically not covered by the policy.
- Claims: When an event that’s covered by your policy occurs, you file a claim with your insurance company to request payment under the terms of the policy. Most policies specify the amount of time you have to file a claim, or simply state that it must be done “immediately” or “in timely manner.”
- Deductibles: For certain types of insurance, like car or earthquake insurance, you have to pay a certain dollar amount or percentage of the claim before your insurance benefits kick in. This is known as a “deductible.”
- Policy Limits: The amount an insurance company will pay is not unlimited. Your policy will list the limits for different categories, such as $20,000 for bodily injuries in a car accident, or $500,000 for a life insurance claim. You must pay for costs beyond these limits.
- Risk Allocation: Insurance companies are able to cover the benefits they provide and make a profit by charging premiums according to a risk assessment of each insured, and by insuring a mix of people who are likely to use their insurance and those who are less likely to use it.
Types of Insurance
There are many types of insurance, and most are completely optional from a legal standpoint. However, there are a few that are mandatory. For example, almost every state requires you to carry some level of car insurance in order to drive your car legally. And unless you qualify for an exemption, current federal law requires you to have health insurance. Additionally, some insurance is required by private individuals or companies. For instance, homeowner’s insurance is required by most banks and lenders as a condition of obtaining a mortgage. Other kinds of insurance include dental, renters, flood, boat, pet, business, fire, and title insurance, though there are many more.
What Is Insurance? Types of Benefits
When it comes to the actual insurance benefits, there are two basic types – indemnity and liability – and some plans include both. Under an indemnity policy, the insurance company pays for certain losses or events that occur, like death, illness, or damage to your house. A liability policy pays other people if you’re found liable for their damages, like personal injury or property damage. Some plans include both liability and indemnity coverage.
Insurance plans aren’t only about paying for certain losses. Under some policies, the insurance company agrees to provide your legal defense in case you are sued for certain things. For example, under title insurance, the insurance company will defend you against someone’s claim that they have an ownership interest in your new home.
Obligations of the Insurance Company
Each state has its own laws regulating the conduct of insurance companies and their agents. Generally, since an insurance policy is a contract, the insurance company must abide by state contract laws and act in good faith in conducting its business. You may file a breach of contract lawsuit or a bad faith lawsuit if your insurance company fails to abide by the terms of your policy, acts unfairly, or markets its products inappropriately. You can also appeal to your state’s insurance department to file a complaint against your insurance company.
Of course, you also have to abide by the terms of your policy if you want to receive benefits under that policy. Therefore, you have to pay your premiums on time and refrain from committing any kind of insurance fraud. Otherwise, you risk forfeiting your rights or even having your entire policy cancelled.
Get Help Defending Your Insurance Rights
Many of us rely on both the benefits and peace of mind that our insurance policies provide. From the dents and bruises covered by a car insurance policy, to the large sums of money promised under a life insurance policy, we assume that these benefits will be there when we need them. If your insurance claim has been denied or you’re dealing with an uncooperative insurance company, contact a local insurance attorney who can help protect your rights and interests.