What is Insurance?

Insurance is a contract in which an insurer agrees to provide compensation for a policy holder’s risk in exchange for a regular payment known as a premium. Premiums are pooled into a collective fund used to mitigate individual risk. As more people pay into the fund, risk is spread and the group can collectively absorb large monetary damages that individuals couldn’t absorb alone.

This video explains the contract aspects of insurance.

By holding many contracts and designing smart policies, insurers are able to offer benefits that provide value to individual policy holders while still being profitable to the insurer over time.
  • The insurer bets that its policy holders will pay in more than the insurer will have to pay out over time.
  • Individual policy holders bet that, when the insurance pays out, it will pay out more than the policy holder paid in.
  • If an insurance plan is designed correctly, it will always pay the insurer more than the insured over the long run.
  • However, individual policy holders can shop for plans that fit their needs and increase the chance that it will benefit them more than the average policy holder. In this way, a smart shopper can ensure they get value from their coverage.

This video explains the basics of what insurance is.

Even though the basics of how to save money on insurance is the same for all insurance types, each insurance type has its own unique set of tips and tricks. Almost more importantly, each insurance type has it’s own set of deadlines, laws, and rules. You can save serious money by knowing the rules, knowing the facts, and knowing a few tips and tricks. So, let’s cover some of the most important basics of insurance including the different insurance types.

  • If you drive, you need auto insurance.
  • If you own a home, you need home owner’s insurance.
  • If you make more than the tax filing threshold, you have to have health insurance.
  • Most people will find some type of life insurance to be a smart buy.
  • Basic things, like extended warranties and knowing how the FDIC works, are important.
  • In fact, insurance is a very important and vast subject.

Costs and important terms typically associated with insurance include:

  • Premium
  • Deductible
  • Out-of-pocket costs
  • Out-of-pocket maximum
  • Covered benefits
  • Allowed amount
  • Policy period