Definition of Insurance

Insurance is a contract entered into by two parties called the insurer and the insured. The insurer (most often an insurance company) sells the insured (the client) a fixed amount of money called a premium. The insurance company pays the client the promised amount of money at the time when an event covered by the insurance happens. Such an event may be terminal illness, death, unemployment, work or car accident, burglary, and others.

In simpler terms, insurance is a policy that ensures a client some form of financial relief after a certain undesired or unexpected event occurs. Such events include a car accident, poor health, death, prolonged illness, loss of employment, theft and burglary, and other types of accidents or disasters.

How Insurance Works in Practice

When a person applies for an insurance (e.g. health insurance, car insurance, life insurance, educational insurance, etc), he or she pays a fixed amount of premium to the company that sells the policy. In cases where the undesired event does not occur, and the money is not claimed, the insured cannot take the money back. Instead, the money is accumulated along with the premiums of other clients. Only those who meet the requirements of the contract can receive the amount of money insured by the company. Although it may not look like a very good contract to enter into, it is good to look at how the system works before making any judgment. The very basic idea behind the whole system is that every member helps contribute to a pool of money that will someday help other members who become financially burdened during certain unexpected events. Eventually, some people benefit from the money and under various unfortunate circumstances, one of these people could be you.

Types of Insurance

There is a large variety of insurance contracts such as property insurance, liability insurance, life insurance, professional insurance, credit insurance, and others. Below are some of the most common types.

Property Insurance

Property insurance is a type of insurance that is designed to protect the insured from tangible property loss. When a certain property is damaged or completely destroyed, the insurance company is bound by law to refund the value of the property lost or pay for an amount equal to the total damage done. The maximum amount of cash payable by the insurance company depends on the stipulations of the contract that has been entered into by both parties.

Liability Insurance

Liability insurance is another type of insurance that protects people from legal liabilities. When a person is legally obligated to indemnify a certain property he or she damaged, or to pay the medical bills of a person he or she injured, the insurance company handles the financial obligations instead of him or her.

Professional Insurance

The professional insurance is one of the most expensive types of insurance you may choose. Doctors, lawyers, engineers, and other professionals enter into this type of insurance in order to protect themselves from the financial obligations arising from bad decision making. All people make mistakes and so do well-trained professionals.

Life Insurance

This type of insurance is one of the most common insurance policies bought by the bread winners of a family. This type of insurance gives protection to the survivors of a deceased insurance holder. When the owner of the policy dies, his or her heirs or beneficiaries are awarded a lump sum of money. It can also be given to the survivors according to the arrangements of the policy holder. These may be specified in his or her will.

Credit Insurance

The credit insurance helps repay a portion of all of the credit of a person under certain circumstance such as death, disability or unemployment. Mortgage insurances insure lenders against default on the part of their borrowers. Mortgage insurance is a sub-type of credit insurance although the latter typically refers to policies covering against different kinds of debt. In addition, most credit card companies provide payment protection plans which also represent a type of credit insurance.

Other Types of Insurance Policies

In addition, there are dozens of different types of insurance. The ones above are some of the most common types one may consider. Other examples are collateral protection insurance, expatriate insurance, DBA insurance, financial loss insurance, kidnap and ransom insurance, title insurance, locked funds insurance, nuclear accident insurance, and many more. Interesting types are also the fidelity bonds and the pets insurance.

Insurance Companies

Insurance companies fall into two general categories: non-life and life insurance companies. General or non-life insurance companies sell different types of insurance except for life insurance. The latter is offered by the life insurance companies. The non-life insurance companies may be further categorized into excess lines and standard lines. The importance of insurance could never be emphasized enough. There is a really good reason why it was invented: people never know when they are going to need it.