Introduction
You brush your teeth, right?
Right?
Okay, let's just say you brush your teeth. Why do you do it? To prevent cavities and really nasty gum diseases. You're doing something now to protect yourself from something later on.
That's insurance. And it's just good sense.
When it comes to money, insurance works like this: you pay a small amount each month—money that you'll never get back—but if something bad (or normal, but costly) happens, your insurance company (the people you've been paying every month) will pay the big bucks on your behalf.
Here are some of the main kinds of insurance:
- Car insurance
- Health insurance
- Property insurance
- Business insurance
- Life insurance
- Unemployment insurance
- Credit insurance
- Liability insurance
- Casualty insurance
- Sickness insurance
- Accident insurance
- GAP insurance
- Pet insurance
And that's just the start. Pretty much any disaster (natural, personal, or otherwise) that you can think of is covered by some kind of insurance.
How Insurance Works
Click on through the rest of this section for all the nitty-gritty details, but here's the gist on how insurance works:
1. You sign an agreement with an insurance company.
The company decides how likely you are to claim money from them (based on loads of factors) and how likely you are to pay your insurance costs on time (based on loads of other factors). Based on that information, the company quotes you a price you're going to pay each month. This amount you pay each month is called a premium.
2. You pay your premium every month.
If you pay your premium every month, you'll continue to be covered by the insurance policy. If nothing goes wrong, you just continue to sit pretty, shedding cash. If something does go wrong…
3. You file a claim.
Filing a claim basically means telling the insurance company (via lots of paperwork) that something has gone wrong and asking them to pay for it.
4. The insurance company will look into the claim.
They'll make sure that you really have a reason to ask for money and will check to see whether the problem is covered by your insurance. If it is…
5. The company will decide how much money you can get for the problem.
They'll pay for some or all of the costs, depending on your agreement. Sometimes you'll have a deductible, meaning that until something costs a certain amount, you still have to pay; other times there will be a co-pay, meaning that you pay a set amount every time no matter what.
6. Your premium goes up.
If you file a claim, it raises a red flag for the insurance company, like "Hey, this person is probably gonna cost us a lot of cash." That means they'll raise your premium so you have to pay more each month.
Moral of the story?
Drive safely.