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What Is Insurance?

Insurance is an excellent way to manage financial risks. It's a contract in which an insurer protects the policyholder from losses. Insurance covers financial losses from accidents, injury, or property damage. It can also give financial protection for costs associated with liability for damage or injury caused to a third party.

The types of insurance policies available can cover all your needs. Insurance providers work to offer the types of coverage and insurance products that will meet consumer needs.

Each state regulates the insurance industry within its borders. But what is insurance, and how does it work? This article offers an overview of insurance and how it works.

What Is Insurance?

Insurance is a contract between you and your insurance company. The insurance company agrees to provide financial protection or reimbursement of losses from a covered event in exchange for premium payments and following the contract terms.

You abide by the terms of the contract. The insurer covers costs associated with certain types of misfortune. Or the insurance company can shield you from certain types of liability.

Categories of Insurance Benefits

There are two basic types of insurance benefits: indemnity and liability. Some plans include both. Under an indemnity policy, the insurance company pays for certain losses or events, like death, illness, or damage to your house.

A liability policy pays other people if you're liable for their damages. Liability coverage covers damages resulting from, for example, personal injury or property damage.

Insurance plans are about more than just paying for specific losses. Under some policies, the insurance company agrees to provide your legal defense. Insurance covers you if someone sues you, and you are liable for a sum of money in a settlement or a verdict. For example, under title insurance, the insurance company will defend you against someone claiming they have an ownership interest in your new home.

How Does Insurance Work?

Insurance has several essential parts that make the system work. These include the following:

  • Premiums: Insurance companies collect premiums (payments) from everyone they insure. Those insured are "insureds." The insurance premiums provide the revenue they need to be able to pay for the benefits they offer.
  • Exclusions: Each insurance policy will list items specifically covered. Typically, anything not listed is not covered, but most policies also list specific exclusions. Exclusions are risks not covered by the policy.
  • Claims: When a covered event happens, you file a claim with your insurance company to request payment under the terms of the policy. Most policies specify the time to file a claim or state that you must file it "immediately" or "in a timely manner."
  • Deductibles: You must pay a specific dollar amount for certain types of insurance, like car or earthquake insurance. Or insureds must pay a percentage of the claim before your insurance benefits kick in. This is a deductible.
  • Copayment: A fixed amount the insured pays for a covered health care service after you've paid your deductible. A health insurance copay covers out-of-pocket costs for covered medical expenses. Copays are a specific dollar amount. They are not a percentage of the total cost of the medical bill.
  • Policy limits: The maximum amount an insurer will pay under the policy. The amount an insurance company will pay is not unlimited. Your policy will list the amount of coverage for various categories. It will list the limits for different categories, such as $20,000 for bodily injuries in a car accident or $500,000 for a payout for term life insurance. For liability insurance coverage, the amount of money available is your limit. You must pay for costs exceeding the limits.
  • Risk allocation: Insurance companies can cover the benefits and make a profit by charging premiums according to a risk assessment by the underwriters. Those with higher risk profiles pay higher premium amounts. Insurance providers also insure a mix of people who are likely to use their insurance and those who are less likely to use it. They can also offer higher deductibles for lower premiums.

Types of Insurance

There are many types of insurance. Most insurance coverage is optional. But there are a few that are mandatory. For example, almost every state requires you to carry car insurance to drive your car legally. As of Jan. 1, 2019, there is no mandate for health insurance at the federal level. Some states have individual mandates requiring health coverage to avoid a tax penalty.

Private people or companies need insurance in certain circumstances. For instance, most banks and lenders require homeowner's insurance. They demand home insurance as a condition of getting a mortgage. Other kinds of insurance include the following:

There are other types of insurance as well. Most people or businesses can find a company willing to insure them for a price.

Why Is Insurance Important?

You may own a car and get hit by an uninsured motorist. Your car insurance can cover medical expenses from the accident. You may own a home and have a homeowner's policy to help you recover from property damage following a natural disaster. You may also use health insurance policies to pay your medical bills. Almost everyone in the U.S. will get insurance at some point.

Insurance helps manage financial risks the insured person faces. You buy protection to help with unexpected financial losses. The insurance company pays if you experience a loss. You may be responsible for all costs if you don't have insurance coverage and experience losses or legal liability.

Insurance is critical because it helps protect you, your loved ones, and your assets. An insurance policy can even provide beneficiaries with a lump-sum cash death benefit if you die. Insurance offers peace of mind on unforeseen financial risks.

Insurance Company's Obligations

Each state has laws regulating the conduct of insurance companies and their agents. Since an insurance policy is a contract, the insurance company must follow 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 meet its obligations by engaging in acts such as the following:

  • Failing to follow the terms of the policy
  • Acting unfairly
  • Marketing its products inappropriately

You can also appeal to your state's insurance department to file a complaint against your insurance company. You must follow the terms of your policy if you want to get benefits under that policy. You must pay your premiums on time and refrain from committing insurance fraud. Otherwise, you risk forfeiting your rights or even canceling your entire policy.

Get Help Defending Your Insurance Rights

Many of us rely on our insurance policies' benefits and peace of mind. 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 these benefits will be there when needed. If your insurer denied an insurance claim or you're dealing with an uncooperative insurance company, contact a local insurance attorney who can help protect your rights and interests.

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