Why Do People Buy Insurance?

Insurance is not only a good idea in many cases, often is it necessary to own a policy in order to do certain things. Driving a car in most states requires some sort of insurance to protect both life and property should an accident occur. Purchasing insurance for a home is required by most mortgage companies. Other insurance policies are not necessary but can be beneficial.

What Insurance Does

• An insurance company provides a policy based on the risk factors for a particular situation. For a homeowner it is the risk of loss due to a catastrophic event. In many cases geographic area plays a part for factors such as hurricanes, tornadoes or earthquakes. Other types of insurance such as medical insurance, both assist you on a regular basis for standard items such as preventative care, but also protect you should a major health issue take place. Insurance protects you should an event occur that could completely change your standard of life, whether due to accident or injury, loss of a home, or even a financial setback.

How It Works

• When you purchase a policy, the hope is you will not need it. The insurance company calculates the policy based on the risks involved, and charges rates depending on the statistics of an event happening under the policy you purchase. If you are a good driver, auto insurance will cost less. If you have had accidents, you pay more because your risk is higher. The insurance company operates on the knowledge not everyone will need to use its policy to make a claim. This is how it can offer both an affordable policy and be able to pay claims. The company pools money and pays claims from the collected funds. You are hedging against the risk we all assume, and hoping you will not have to make a claim, but putting money into the pot knowing you will be covered in the event you do.

Industry Uses

• Large companies purchase insurance to protect themselves against losses such as lawsuits, product failure and other possible problems. This helps the consumer because should you have a problem with a particular product that is serious, you may receive some relief from the company through its insurance. Doctors also purchase insurance such as malpractice insurance should something go wrong during a procedure or surgery and the need to have financial means to pay off a serious claim comes about.

Life Insurance

• One thing you can insure against that is guaranteed to happen is loss of life. An insurance policy that pays out on death is a hugely popular financial instrument. People purchase policies that save money or increase in value. Insurance company can profit by paying out these type of policies, because the odds are low that someone will keep this policy for the extended number of years it takes to build to a large financial payout. While life insurance is a good idea to cover death expenses, life insurance is less successful as a instrument to build wealth. Term insurance is purchased as an alternative to cover burial expenses and provide for some financial assistance when a person dies, but is limited to the specific policy amount that was purchased.

Necessary Expense

• Often when sending out that check to pay for insurance it feels as though the buyer may be paying for nothing. The reality is you pay a little now to avoid losing everything later. Insurance provides both peace of mind and protection from several situations that can occur. It is true that you can be overinsured. Consumers should be careful to select a reputable agent who will advise them on prudent use of policy purchases.