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What is Insurance

Insurance is a contract, represented by a policy, under which an individual or entity receives financial protection or reimbursement from an insurance company in the case of a loss. The company pooled the risks of its clients in order to make payments more affordable for the insured.

Insurance policies are used to protect against the risk of financial losses, both large and small, that may occur as a result of damage to the insured's or her property, or liability for damage or injury caused to a third party.

How Insurance Works

There are numerous insurance policies available, and almost any individual or business can find an insurance company willing to insure them—for a fee. Auto, health, homeowners, and life insurance are the most common types of personal insurance policies. Most Americans have at least one of these types of insurance, and car insurance is required by law.

Insurance Policy Components

It is critical to understand how insurance works before selecting a policy.

A solid understanding of these concepts will go a long way toward assisting you in selecting the policy that best meets your needs. Whole life insurance, for example, may or may not be the best type of life insurance for you. There are three critical components of any type of insurance (premium, policy limit, and deductible).

Special Considerations

People who have chronic health issues or require regular medical attention should look for health insurance policies with lower deductibles.

Though the annual premium is higher than that of a comparable policy with a higher deductible, the lower cost of medical care throughout the year may be worth the trade-off.


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