Insurance is a way to manage your risk. When you buy insurance,
you buy protection against unexpected financial losses.
The insurance company pays you or someone you choose as
something bad happens to you.
If you have no insurance and an accident
happens, you can be responsible for everything
related costs. Having the right insurance
because the risks you face can make a big
difference in your life.
People don't just get insurance to help
risks of unexpected events, but also to
help pay for routine things, like annual
medical examinations and dental visits. In addition, insurance companies negotiate
discounts from health care providers, so their customers pay those discounted rates.
An insurance policy is a written contract between the policyholder (the person or
company that gets the policy) and the insurer (the insurance company).
The policyholder is not necessarily the insured. An individual or company can get
an insurance policy (making them the policyholder) that protects another person or
entity (who is the insured). For example, when a company buys life insurance for a
employee, the employee is the insured, and the company is the policyholder.
How does insurance reduce your financial risk?
Imagine you are driving your car and you hit a deer, which damages your car. If you
have the right kind of car insurance policy, the insurance company will the
cost of the car repair (minus the deductible — the part you have to pay).
Now imagine a water pipe bursting in your bathroom and ruining everything in it
room and in the bedroom next door. Typically, if you have homeowners or renters
insurance, the insurance company will pay to replace some or all of the damaged
property, once you have paid your deductible. Insurance policies only pay for things
which is described in the policy. It is therefore important to read a policy carefully beforehand
you buy it so you will know exactly what is covered.
Summer 2022
BUILDING BLOCKS STUDENT HANDOUT 2 of 3
What is insurance?
How does an insurance policy work?
Insurance policies are often in place for a specific period of time. It can be
referred to as the policy term. At the end of that term, you must renew the policy
or buy a new one. With some types of insurance, you choose a beneficiary, the
person you want to receive the policy's benefits or payments.
When you buy an insurance policy, part of your responsibility to pay includes
a fee called a premium. Some premiums are paid monthly, such as health insurance.
Others may be paid once or twice a year, such as auto or homeowner's insurance.
The cost of your premium generally depends on how much of a risk you are.
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