What Insurance Is
Put simply, insurance is a way to manage financial risk.
Individuals and groups buy insurance to protect themselves from unexpected costs, like a car accident, house fire, or health emergency.
By buying insurance, you avoid paying the entire cost of a large expense, helping to keep you financially stable and able to recover.
How Insurance Works
Insurance providers offer various policies, which are contracts that set the terms for what the insured will pay and the insurer will cover.
The insured pays the insurer a fee to stay covered, called a premium. Additionally, the insured may have to pay a deductible – a fee paid in advance of utilizing insurance.
The insurer will then pay its share of the cost for any situations covered by the policy.
Kinds of Insurance
Common types of insurance policies include:
- Auto
- Dental
- Health
- Homeowners
- Life
- Travel
- Vision
Policies cover expenses that may be incurred in these areas.
For example, a dental insurance policy can help cover the cost of getting a cavity filled; a homeowner’s policy can help cover the cost of rebuilding after a flood; and a life policy can help cover the cost of living after the death of a family member.
Policies will detail what is covered by the insurer, and some will even include what is not covered just for the insured’s awareness.
Insurance Key Terms
Below is a list of key terms often used in the insurance industry, as defined by the National Association of Insurance Commissioners (NAIC).
- Benefit – The service or coverage the insurance policy provides.
- Claim – A request asking your insurer to pay its share of the bill for a covered event or service.
- Copayment – The fixed amount you pay for services (usually medical services) before your insurance company starts to pay its share (also called a copay).
- Coverage – What the policy protects.
- Deductible – The dollar amount or percent of a claim that you pay yourself before the insurance company pays its share.
- Insured – The person the policy protects.
- Insurer – The insurance company.
- Premium – The regular payment you make to an insurance company to keep your coverage active, regardless of whether you file a claim (depending on your policy, premiums can be paid weekly, monthly, twice a year, or annually).
- Prior Authorization – Insurance company staff decide whether your insurance will cover a health care service or a drug.
- Policy – The written contract between you and the insurance company.
- Underwriting – The insurance company looks at the risk of insuring you and decides whether to give you a policy, how much to charge, and/or how much coverage you get.