Insurance is a contract between you (or a business) and an insurance company to help protect you and your loved ones from financial loss due to an unexpected event, like an accident, illness, natural disaster, or other unexpected circumstances. In the case of medical, dental or vision insurance, it can also help keep you or your family healthy by offsetting —and sometimes covering — the cost of routine care.
The insurance contract itself is called a policy. The policy outlines who or what will be covered under the contract, the circumstances for which payment will be issued by the insurance company, who will receive the payment, and how much they will receive.
Key takeaways
- Insurance is a contract between an individual or business with an insurance company to help provide financial protection and mitigate the risks associated with certain situations or events.
- There are various types of insurance available, including health, dental and vision, life, auto, and legal insurance.
- Key components to consider when comparing insurance policies are the deductibles, premiums, and policy benefits.
- During open enrollment, you may be able to get certain types of insurance — like dental, vision, and health — through your employer or government marketplace.
Why is insurance important?
Insurance helps to financially protect you, your dependents and your assets from emergencies, unexpected expenses, and losses. It mitigates risk by transferring potential financial burdens to providers in exchange for regular (typically monthly) payments known as premiums. An insurance policy can help you cover expenses related to routine healthcare, property damage from a natural disaster, or veterinary costs when your pet gets sick.
Overall, the purpose of insurance is to help provide security, stability, and support in times of need. Having insurance may allow you to live your life with fewer worries, knowing you have a financial safety net in place.
Insurance terms you need to know
- Insurer: the insurance company providing the insurance policy
- Policyholder: the person named on the policy
- Policy limit: the maximum amount of money an insurance provider will pay out
- Premium: the payment you make to the insurance company to keep your policy active
- Deductible: the amount of money you’re responsible for paying out of pocket before insurance will pay out
- Coinsurance: a percentage of costs you pay after meeting a deductible
- Copay: a flat fee you pay each time insurance is used
- Claim: a formal request for an insurance company to cover payments
Find more insurance terms and definitions here.
How does insurance work?
To put it simply, you pay a premium (usually in the form of a monthly payment) to your insurance company, and in exchange, the company will help pay for any covered accidents, routine wellness visits, and many other situations. Once you’re enrolled in your plan and it has taken effect, you’re covered until you stop paying your premiums or your policy ends. Whether you go to a routine doctor’s visit, experience damage to your home or car, or just need your teeth cleaned, your insurance company will help pay for services that fall under the scope of their coverage — either by reimbursing you directly or paying the service provider. However in some instances, before you receive reimbursement from your insurer, you’ll first need to reach your deductible.
Filing a claim
Some circumstances require you to file a claim to collect any money. That means if something happens, you’ll have to submit a request to your insurance company to receive a payout. Information on how to file a claim is typically in your policy documents. In some cases, the service provider you visit — e.g., your doctor, dentist, therapist, etc. — will handle communications directly with the insurance company.