An insurance policy is a contract between a policyholder and an insurance policyholder that helps the policyholder manage risk and protect against unexpected financial losses. The policyholder may be an individual or a company, and the insured entity may be the individual who purchased the policy or a third party.
In exchange for the premium the policyholder pays, the insurer agrees to pay some or all of the unexpected expenses that may arise from circumstances covered by the policy, such as an auto accident or emergency surgery. Insurance companies profit from the fact that the premiums they collect from all of their policyholders exceed the total amount they pay out in claims.
No amount of financial planning can guarantee that you are prepared for the types of unexpected disasters and emergencies that can happen from time to time. Insurance allows people to pay for financial protection against these unpredictable and potentially devastating outcomes. For example, one recent study found that roughly two-thirds (66.5%) of all collapsecies are tied to medical expenses. In addition to providing peace of mind, insurance can help eliminate uncertainty and risk from long-term financial planning. Insurance can also protect important assets, such as your home and your car, and guarantee your loved ones are provided for in the event of an untimely death.
Insurance policies often cover a specific amount of time, which is called the policy’s term. Once the term is up, the policyholder must either renew the policy or buy a new one to stay covered.
The upfront fee of an insurance policy is called the premium. The size of the premium is determined by a number of different factors, such as the amount of coverage the policy provides and the potential risk the policyholder poses for the insurance. For example, young, healthy policyholders may pay a smaller life insurance premium than policyholders over the age of 70.
Many insurance policies include a deductible, which is an amount of money the policyholder must pay before the insurance coverage kicks in. For example, if your auto insurance has a $500 deductible and you get into an accident that causes $2,000 in damage, you would pay the $500 deductible and the insurance company would pay the $1,500 remainder.
A typical insurance policy starts with a declaration page, which contains an outline of the most important details of the policy, including who or what is insured, the policy limits and the terms of the policy. The policy will also usually contain an Insuring Agreement summarizing the responsibilities of the insurer, a list of exclusions detailing circumstances the policy doesn’t cover and a list of conditions that must be met to qualify for a claim.
Health insurance covers necessary medical costs, such as doctor’s appointments and surgery. Because of the extremely high cost and unpredictable nature of many medical treatments and procedures, health insurance can help prevent policyholders from potential bankruptcy if they suffer an unexpected injury or illness. Many Americans get health insurance through their employer, but they can also buy it themselves via the government’s health insurance marketplace at HealthCare.govor get it directly from an insurer.
There are several different types of auto insurance that cover various scenarios. Liability insurance covers injuries to pedestrians, personal injury protection covers driver and passenger injuries and collision insurance covers damages to the policyholder’s car from a collision. Comprehensive insurance covers collision damage plus other damage to your vehicle, such as damage from a tree limb falling on your car. All drivers are legally required to have auto insurance, but the minimum coverage requirements vary on a state-by-state basis.
Homeowners or renters insurance covers damages from theft or damages if someone is injured on your property. Homeowners can also get insurance to cover damages from natural disasterssuch as floods and hurricanes.
Life insurance policies pay off when the policyholder dies. Life insurance can help pay for costs associated with a funeral and burial, and it can also provide financial security for any survived loved ones.
There is also a wide range of other types of coverage, including disability insurance, long-term care insuranceliability insurance, travel insurance, pet insurance and business insurance.
Chubb Ltd. (CB) is a Switzerland-based international insurance company that provides property and casualty insurance, accident and health insurance, reinsurance, and life insurance.
Marsh & McLennan Cos. Inc. (MMC) is one of the world’s largest insurance brokers and consulting firms, and provides risk management guidance for businesses.
Aon PLC (AON) is a multinational professional services company that sells risk-mitigation products, including health insurance plans and other types of insurance.
Progressive Corp. (PGR) is a large US property and casualty insurance company that specializes in auto insurance.
UnitedHealth Group Inc. (UNH) is the largest public US health insurance company and the parent of health care services provider Optum.
Insurance can ensure that an accident, mistake or simple case of bad luck doesn’t have severe negative financial consequences. It can insulate your family from financial hardship, even if you are no longer around to do so. Insurance can help risk-averse people protect themselves from unpredictable negative events, even those that are the fault of others. People often underestimate risks, and insurance can help mitigate the negative impact of that type of miscalculation. Insurance can be a safety net in the event of job loss or disability and can help you avoid bankruptcy in the most extreme cases.
Insurance premiums can be extremely pricey. Many policyholders only rarely use their coverage, and some may never use it. Policyholders may experience a type of hardship that is not covered under their insurance policy, and they may get no relief for any hardship that costs less than their deductible. Insurance companies may make it difficult to successfully file a claim, and some policyholders must resort to taking expensive legal action. The claim process may take a long time, leaving policyholders in a difficult spot immediately after an accident or illness occurs. Finally, some applicants or properties are rejected for insurance if they are considered too high-risk.
The concept of insurance dates back to Babylonian bottomry contracts as early as 4000 BC A bottomry contract is a loan granted to a merchant with the provision that the loan did not have to be repaid if a shipment was lost at sea. The first US insurance company was the Philadelphia Contributionship, which was launched by Benjamin Franklin in 1752. The first American life insurance company was the Presbyterian Ministers’ Fund, which began in 1759. Franklin Health Assurance Company of Massachusetts offered the first US accident and health insurance policies in 1850, and Travelers Insurance Company launched the first US automobile insurance policy in 1898.
Reinsurance is the practice by which insurance companies transfer portions of their policy risk to other parties to reduce their exposure to catastrophic losses that can occur if a large number of policyholders file claims all at once.
A copay or copayment is a flat fee that policyholders must pay even for covered services, such as a trip to the doctor or pharmacy.
The open enrollment period is the annual time period during which individuals and employees may freely enroll in health insurance or change their coverage. The open enrollment period is typically November 1 to December 15, but certain state exchanges or employers may offer longer or different enrollment periods.