Money and Finance
Insurance
What is insurance?
Insurance is something people buy to protect them from loss. They pay a fee to a company in order to protect something that is important to them. You can buy insurance for most anything, but most people have insurance that protects big items like their house or their car.
Why do people get insurance?
People get insurance to protect them from taking a big loss that they can't afford. For example, a person may pay $500 every year on insurance to protect their home. While $500 is a lot of money to pay each year, if their home burned down, they would be out hundreds of thousands of dollars if they didn't have insurance.
Insurance Spreads the Risk
Insurance helps to spread the risk among a number of people. Take the example of insurance on a home. The insurance company collects fees from thousands of home owners each year. The insurance company then uses that money to pay to rebuild any of those homes that were damaged or robbed. Each person pays a little, so no one person has to pay a lot.
Types of Insurance
There are all types of insurance available. You can get insurance on just about anything. Below are some of the most common types of insurance.
Auto - Auto insurance protects your car as well as other cars if you have an accident. It also protects the car from theft. Anyone driving a car needs to make sure they have liability auto insurance (read about liability below).
Disability - Disability insurance helps to pay the bills if a person gets injured and can't work.
Health - Health insurance helps to pay medical bills if you get sick.
Homeowners - Homeowners insurance protects your house in case of theft or damage.
Life - Life insurance pays in the case someone dies. One type of life insurance, called "term" life insurance, pays a lump sum to the beneficiary when the person dies. Parents often get term life insurance to help their children in the case of their death.
Liability - We mentioned liability insurance in the auto section above. Liability insurance helps to pay if you get sued and are found negligent. For example, auto liability insurance helps pay for the other person's car or their medical bills if you cause an accident.
Unemployment - Unemployment insurance is paid by businesses to the government to help pay for people who are out of work. It helps people pay the bills while they are in between jobs.
Each Policy Is Different
Each insurance policy is different. Two different homeowners insurance policies may cover different things. For example, most homeowners insurance policies don't cover floods, but some do. It is important to read over your insurance policies (no matter how boring) and understand what they cover. After all, you need to know what you are paying for.
Do I need insurance?
If you are an adult you probably need a list of insurance policies such as auto, life, home, disability, and health insurance. You should talk to an insurance agent to get their advice on your situation. If you are a kid you probably just need health insurance, which you hopefully have through your parents. Once you get your driver's license, you will need auto insurance. Talk to your parents to find out what insurance you have and what you need.
Interesting Facts About Insurance
- Keith Richards, the guitarist for the rock band the Rolling Stones, once insured his middle finger for $1.5 million.
- Another rock star, Bruce Springsteen, insured his voice for $6 million.
- Football player Troy Polamalu insured his hair for $1 million.
- Some people with expensive weddings insure their weddings in case they have to cancel for illness or some other reason. There is even "change of heart" insurance in case either the bride or groom decides not to show up.
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Note: This information is not to be used for individual legal, tax, or investment advice. You should always contact a professional financial or tax advisor before making financial decisions.
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