Insurance: Definition, How It Works & Types of Insurance

what is insurance and types of insurance

In simple words, insurance can be defined as a contract in which you (the policyholder) receives financial protection or reimbursement from an insurance company. In accordance with the terms of the agreement, you pay your insurance company regular premiums in exchange for them guaranteeing payment to you in the event of an unfortunate incident.

The insurance company accumulates its clients’ risks so that payments become more budget-friendly. There are insurance policies for vehicles, homes, health, and more. Everyone understands the significance of insurance but very few people have comprehensive knowledge about the phenomenon. In this blog, we will delve into the A to Z of insurance plans and their major variants.

 

What is Insurance? How Does It Work?

To begin with, insurance is a safety net against unforeseen and unfortunate loss. So, if you experience an unpredictable and life-altering event that causes financial loss, your insurance policy will provide compensation. For example, if you met with an accident on your way to work in the car and the car suffers damage. The insurer will reimburse the repair expenses. However, you cannot expect reimburser for usual depreciation and wear-and-tear.

An insurance policy works with the help of three components.

  • Premium – It is the money you pay to the insurance company to avail the insurance plan’s benefits.
  • Policy Limit – It is the maximum amount an insurer will pay for a covered loss under a specific insurance policy.
  • Deductibles

You must pay a certain sum before the insurance settles a claim. Deductibles prevent many minor claims.

 

Top 7 Types of Insurance Policies – A Crisp Guide

  1. Health Insurance

In simple words, a health insurance plan is a contract between a corporation and a consumer that pays all or part of the insured’s healthcare expenditures in return for a monthly fee. Usually, the contract has tenure of one year, during which the insurance company has to pay specific expenses related to illness, pregnancy, injury or preventative care.

Also read: Difference Between Critical Illness And Life Insurance

Health insurance policies reduce the costs for illnesses, injuries and accidents. In the United states, most employers provide some level of health insurance to their employees, wherein both the employer and the employees share the cost of coverage. There are various types of health insurance plans, with the most common ones being health maintenance organization (HMO plans), preferred provider organization (PPO) plans, and more.

  1. Disability Insurance

As the name suggests, disability insurance is intended for people who are disabled. There are two main variants – long-term or disability and short-term disability insurance plans. The latter is meant for disability that lasts from three to six months, based on the plan design and usually covers up to 60 percent of the employee’s base pay.

On the other hand, long-term disability insurance plans kickstart after the short-term disability policy’s plan ends. Usually, it pays you for two to ten years and can last longer based on the plan design. However, there are a lot of technical nuances that come with disability coverage. For instance, some insurance plans pay out if you are disabled and unable to perform at regular occupation. On the contrary, other types of disability insurance plans might not pay out unless it is determined that you cannot work at all.

  1. Life Insurance

Life insurance guarantees that your beneficiaries—such as your spouse or children—receive a payout if you die. In exchange, you have to pay premiums during your entire lifetime. There are two main types of life insurance plans – term life insurance and permanent life insurance. Term life insurance is the most common and basic plan and also the least expensive. It covers you for a specific time period, such as 10 or 20 years. Your beneficiaries will receive a payment during the stipulated tenure.

Also read: What is Title Insurance? Reasons Why You Need Title Insurance

Permanent life insurance, on the other hand, covers your whole life as long as you continue paying the premiums. The payout can occur at any point in time should the death of the policy holder occur. However, there is a standard requirement to pass a medical exam to qualify for life insurance.

  1. Long-term Care Insurance

It is a type of insurance that is excellent for the peace of mind of individuals who need short or long-term nursing care. A high level of long-term care insurance might be necessary for people who do not have any assets outside of the policy to pay for nursing care. Long-term care insurance can be costly but it is worth it if your context is compatible with its benefits.

  1. Auto Insurance 

An auto insurance is a safety net that protects you from expanding large sums of money for damages resulting from auto accidents, fire, theft, calamities and third-party persons or property. To use your car insurance, you have to file a claim. Once the claim is made, your auto insurance company will evaluate the damage and pay a settlement up to your policy’s threshold. However, it is essential to remember that not all car insurance coverage is the same.

  1. Homeowners Insurance

Homeowners insurance is a financial safeguard or protection you buy from an insurance company. In simpler terms, it is an insurance plan that helps you repair or replace your home if it is damaged by a covered peril. A homeowners insurance policy covers an individual’s residence, furnishings along with other assets. It also offers liability coverage against accidents that occur in the home or on the property. Furthermore, homeowners insurance also covers additional living expenses if you cannot live in your home due to a problem like fire or vandalism.

  1. Liability Insurance

Last but not least, liability insurance is a type of policy that protects against claims arising from injuries and damage to other people or property. Legal fees and reimbursements are covered by liability insurance. However, intentional damage and contractual liabilities are not covered in liability insurance.

 

Wrapping It Up

So, there we have it, a crisp overview of what insurance is and the 7 main insurance types.