How Insurance Works
Many insurance policy types are available, and virtually any individual or business can find an insurance company willing to insure them—for a price. Common personal insurance policy types are auto, health, homeowners, and life insurance. Most individuals in the United States have at least one of these types of insurance, and car insurance is required by state law.
Businesses obtain insurance policies for field-specific risks, For example, a fast-food restaurant's policy may cover an employee's injuries from cooking with a deep fryer. Medical malpractice insurance covers injury- or death-related liability claims resulting from the health care provider's negligence or malpractice. A company may use an insurance broker of record to help them manage the policies of its employees. Businesses may be required by state law to buy specific insurance coverages
There are also insurance policies available for very specific needs. Such coverage includes business closures due to civil authority, kidnap, ransom, and extortion (K&R) insurance, identity theft insurance, and wedding liability and cancellation insurance.
Life insurance is a contract between an insurance company and a policyholder, where the insurer pays a sum of money to the beneficiaries when the policyholder dies. In exchange, the policyholder pays premiums to the insurer while they are alive.
The main purpose of life insurance is to provide financial security to the policyholder's family. Some types of life insurance include:
Term life insurance
A simple type of life insurance that provides financial protection for a set period of time. It is generally more affordable than permanent life insurance.
Whole life insurance
A policy that covers the policyholder for their entire life, up to a certain age. It usually has a death benefit and a cash value that grows over time.
Endowment policy
A life insurance contract that pays a lump sum after a specific term or upon the death of the policyholder. It can also be an investment plan that helps grow wealth.
Unit linked insurance plan (ULIP)
A combination of insurance and investment. The premium paid for a ULIP is partially used for insurance and partially invested in different funds.
When choosing a life insurance company, you can consider things like their financial strength, customer satisfaction, and the number of policy types they offer.
Insurance Policy Components
Understanding how insurance works can help you choose a policy. For instance, comprehensive coverage may or may not be the right type of auto insurance for you. Three components of any insurance type are the premium, policy limit, and deductible.
Premium
A policy’s premium is its price, typically a monthly cost. Often, an insurer takes multiple factors into account to set a premium. Here are a few examples:
Auto insurance premiums: Your history of property and auto claims, age and location, creditworthiness, and many other factors that may vary by state.
Home insurance premiums: The value of your home, personal belongings, location, claims history, and coverage amounts.
Health insurance premiums: Age, sex, location, health status, and coverage levels.
Life insurance premiums: Age, sex, tobacco use, health, and amount of coverage.
Much depends on the insurer's perception of your risk for a claim. For example, suppose you own several expensive automobiles and have a history of reckless driving. In that case, you will likely pay more for an auto policy than someone with a single midrange sedan and a perfect driving record. However, different insurers may charge different premiums for similar policies. So finding the price that is right for you requires some legwork.