Insurance Q&A: “Why is insurance important?”
The answer depends on what type of insurance we’re talking about.
There are two basic types of insurance; property and casualty, known as P&C, and life and health, known as…you guessed it, L&H.
Both are extremely important in their own right for different reasons. Let’s discuss in more detail.
How Insurance Works
Insurance is designed to protect our physical and financial well being at the lowest possible cost.
This is achieved by insurance companies “pooling” people together by individual risk types, and charging them an appropriate amount of money, known as an insurance premium, in exchange for a promise to pay for claims we initiate for losses.
Ultimately, insurance is a social device that allows large groups within our society to contribute a small amount of money toward the overall well being of the group.
We each pitch in our premium and the group shares the total amount in the pool to pay for claims we would not likely be able to pay out of pocket with our own finance.
And oh yeah…the insurance companies typically makes a dizzying profit on top of that!
It is important to understand how insurance rates are determined to fully understand this piece of the puzzle.
How Insurance Protects the Policy Holder
Property and casualty insurance protects individuals in two ways.
First, our own property and physical well being are protected by a properly fitted policy.
For example, with auto or homeowner’s insurance, you can purchase coverage that will pay to replace or repair property if damaged by a covered cause of loss.
If you run into a cement pole with your car, your insurer will pay for the repairs, less any applicable deductible.
In fact, you may decide to purchase uninsured or underinsured motorist coverage, which will protect you and your property in the event someone driving another vehicle injures you or damages your car and they don’t have any insurance.
Or if their policy doesn’t have high enough liability limits to pay for your loss.
Additionally, medical payments coverage or personal injury protection on an auto policy is designed to pay for injuries you or others in your vehicle may sustain in the event of a car accident, regardless of fault in some cases.
Life and health insurance are designed to protect us in the event we become injured, ill, or worse yet, die. Learn more about how much life insurance you may need to protect your family in the event of your death.
How Your Insurance Policy Protect Others
Property and casualty insurance also protect the general population against property damage and bodily injury caused by us (which also protects us financially).
Auto, homeowners, and commercial liability policies contain coverage parts for our legal liability for these types of damages.
For example, you may have a dinner guest at your home that is injured while on your property.
Your medical payments coverage may be triggered for several different reasons.
If the injury is small enough, in the event you are sued as a result of the injury, or if your medical payments limit is not sufficient to pay for the necessary medical care.
It’s the quickest way to ensure you have the coverage you need at the right price.