What Is The Purpose Of Insurance?

Insurance is something most people don’t like to think about, because in most cases, it means adding on an extra cost to something that you have already paid for and then not knowing whether or not you will ever benefit from it.

In all likelihood you will not receive any benefit from taking out insurance, as the only advantage being insured gives you is providing you with cover should your insured item become damaged, lost or stolen.

However, this doesn’t necessarily mean that you should not be insured, as you never know what the future holds in store for you. So whilst you probably won’t benefit from having insurance, there could come a day when being insured saves you from losing a lot of money. It is therefore up to you to decide whether you are willing to take a risk on something, or protect yourself from that risk.

That’s basically what the purpose of insurance is, to provide you with a form of protection against a possible risk. When you are protected you will be compensated for what you lost, when you are not protected (not insured), you will not be compensated for what you lost.

There are some risks however, that pose such a large potential financial loss that you are advised to insure yourself against them even though the risk of them ever happening is very small.

Typically, these include risks related to your home, your car and your health. Such types of insurance are considered to be primary insurance policies, meaning that you should at least insure yourself against those risks even if you do not insure yourself against any other risks.

The reason for this is simple. Whilst you may be able to recover financially from losing small and relatively inexpensive items, such as a laptop or stereo equipment, large losses, such as those relating to your home, are much more difficult to recover from by yourself.

In the event that something were to happen to your home for example, being adequately insured could mean the difference between having the money to rebuild or repair your home or becoming homeless.

Being insured becomes even more important if you have dependents who rely on your source of income and especially when that income is limited to begin with.

Whilst wealthy individuals may have the funds to recover from and absorb large financial setbacks, most people do not have large amounts of money saved up in reserve for emergencies. In such cases, not having insurance will therefore not only adversely affect your quality of life, but will also affect the quality of life that your family is able to lead.

So as a general rule, just remember that in most cases you won’t benefit from having insurance, as only a small percentage of people ever need to make a claim on their policy. When it comes to small or inexpensive items, you are therefore probably better off saving your money and not insuring such items.

However, when it comes to large expensive losses, even though the chance of you ever needing to make a claim is still relatively small, the size of that loss means that you would be wise to insure yourself against it nevertheless.

What Important Things Should You Insure?

When taking out insurance it is not necessary or wise to insure everything you own. Rather it is better to strategically insure valuable items, so that just in case something happens to them then you will at least have peace of mind that you will be compensated for it.

Whilst there may be a lot of different options and types of insurance (which can be very confusing if you have never taken out insurance before), the basic thing to remember about insurance is that it is there to protect the important things such as your life, health, home and treasured possessions against big losses.

Lets take a brief look at each of these areas so that you can see why it is important to insure yourself for them.

Disability

If you become ill and are unable to work, having disability insurance will allow you to cover your lost income.

Such a policy will pay you up to a certain limit so that you still have some funds coming in. Providing that you have set your coverage limit high enough, you will then be able to continue receiving that income until you are able to get back to work.

For those who have a home mortgage to pay, have children to support or are the only source of income for their family, having disability insurance can prove to be a real life saver and something that you will be glad you had the foresight to take out.

Your Home

If your house burns down in a fire or is destroyed in a natural disaster, then being insured will allow you to rebuild your home and recover your life without taking too much of a financial hit.

A standard home insurance policy will cover you against a set number of risks which are common to all homeowners. In most cases, the coverage provided under a standard homeowners policy will provide adequate coverage for most people.

However, certain people, such as those living in areas which experience very cold weather in the winter or are at risk from flooding, face extra risks that they should either extend their existing policy to cover them for or take out an additional policy to provide them with the level of coverage that they need.

Considering the fact that your home is probably the most expensive thing that you own, being insured against the destruction or damage of your home is definitely something that is worth having.

Your Car

If you are involved in a car accident and your car becomes damaged, being insured will cover the cost of your car repairs and pay for any medical treatment you may need if you are injured as a result of your accident.

Car insurance can also help to protect you from expenses resulting from damage you cause to other people, other vehicles and property. Auto insurance can even be taken out to help cover the costs of any legal action that is taken against you.

Vehicle related expenses can be very large, and in most countries, you will be required to take out car insurance by law. However, the type of coverage that you have will largely determine the level of coverage that you receive and therefore, the amount of financial risk that you are exposed to on the road.

Having a greater level of coverage will mean that your level of uninsured risk decreases when you are on the road, but at the same time will result in you having to pay higher premiums.

So as with any type of policy that you take out, the level of protection you are receiving from a particular policy must be balanced against the cost of maintaining that policy.

Your Health

Health insurance is an absolutely vital type of insurance policy to have if your country does not provide you with free health care via a national health service.

Medical related expenses, such as those for drugs, lab tests and doctor/hospital fees, can be some of the largest fees you are likely to encounter in your lifetime. These expenses will generally rise in line with your level of health.

So the worse your health is, the more you are likely to need to pay for such expenses, and the worse you become injured or the worse you suffer from a disease, the higher such costs are likely to be.

If you do not have a health plan, or do not have an adequate level of health coverage, you may find that you are unable to receive the most appropriate treatment or drug for your condition. In serious cases, this could even put your life at risk.

Your Life

Life insurance is not something that you personally benefit from, as it is designed solely in mind with the aim of providing your dependents with money in the event that you were to die prematurely.

There are two main type of life insurance that you should be aware of.

The first is called term life insurance. This is designed to pay out a death benefit to your dependents if you die within the term that you have insured yourself for. If you die outside this term however, your dependents don’t get anything.

Term life insurance can be useful if you just want to cover certain important periods in your life. For example, you may want to take out a term policy so that if you were to die suddenly, then your family would still have money to pay for the mortgage or have money for the children to go into full-time education.

Permanent life insurance provides your dependents with a death benefit regardless of when you die. As a result, you don’t have to worry about not dying within a specific term and your dependents getting nothing as a result.

Permanent policies however, are usually a lot more expensive to maintain, so not everyone can afford to take such a policy out.

Life insurance is most useful if you are the sole source of income for your family and you have children. With life insurance, your children and your spouse will be able to live as normal a life as possible considering the circumstances.

The Insurance Industry

The insurance industry is an absolutely massive industry, and takes up a significant chunk of any developed countries economy.

This is hardly surprising when you think about it, because even though a lot of people pay into an insurance policy, very few people ever collect from it. As a result, there are many different types of coverage policies to insure just about anything that you could think of.

For example, you can get coverage for your health, your home, your car, your cell phone, certain parts of your body (usually for sports stars), electronic equipment and even for your pet! So when it comes to insurance, if you want to insure something then there is a good chance that you can do it!

However, as we have already discussed, it is usually only worthwhile to insure the valuable things in your life that you would struggle to recover from financial by yourself.

In almost all other cases, you are better off not getting insurance.

Agents & Commission

Most people buy insurance through agents or brokers who work for an insurance company. These agents then earn a commission based on how much and what type of coverage policy they sell you.

Therefore, the more expensive a policy is that an agent can sell to you, the more commission they will make on that sale and the harder they will try to sell it to you.

Unfortunately, for you as the buyer, this can very often result in you purchasing the wrong type of policy and getting insured for something which you don’t actually need.

This is why if you are going to be taking out insurance for anything, it is absolutely essential that you are fully aware of your options and what you need and don’t need to be insured for. Otherwise, you will just be sold a policy which makes your agent or broker the most amount of money.

The best way to avoid this happening to you, and therefore also the best way to save yourself money when buying insurance, is to educate yourself as much as you can about a particular policy and the different levels of coverage it offers you.

This website is a great place to start if you are new to insurance and have never taken out an insurance policy before. We provide advice on all the major policies that you are likely to need, and also tell you what to look out for when buying such policies to ensure that you get the best deal and the right level of coverage.

To find out more about insurance policies, please see the free insurance section here.

In addition to educating yourself, it is a good idea to go to an agent or broker that has been recommended to you by someone you trust, as this way you can be reasonably sure that what they recommend to you is in fact in your best interest.

If you are still unsure about the advice that you have been given, it is worth speaking with 2-3 more agents to see if they are all giving you similar advice or if the advice you are receiving from each agent is totally different.

When Do You Need To Be Insured?

When buying an insurance policy the first things you should insure are the things which will cost you a lot of money should you lose them or they become damaged.

For example, rather than insuring your new laptop, it would be better to get some form of health or disability insurance to cover you in the event that you suffer an accident and become unable to work.

Even though it is far more likely that your laptop will break down than it is for you to get involved in an accident, your laptop isn’t going to cost you a lot of money to repair compared to how much money you would lose if you were unable to work for several months.

This is a very common mistake that many people make when it comes to taking out insurance. They insure themselves for lots of small items so that they are covered should anything happen to them, but by doing so end up needlessly spending a lot of extra money that they could have better spent in a more worthwhile form of insurance or invested elsewhere.

In many cases, more money is spent on the insurance policies than it would cost to replace or repair the items they are insuring! This is just a waste of money and largely comes as a result of a lack of understanding about the basics of insurance and what it should be used for.

Of course, if you are adequately insured against the major risks in your life, then you may choose to insure valuable items that you own such as your expensive laptop or computer against accidental damage.

This however, should only be done once you have adequate coverage for things such as your home, your health and car, and, you are able to afford to take on an extra policy.

What Types Of Insurance Do You Need?

What type of insurance you need really depends on where you are in your life and your current situation. But here are a few guidelines.

Single & Living Alone

If you live on your own and have nobody to support, then the main types of insurance you may need are health, car, home, renter’s (if you rent) and disability insurance (to cover you should you be unable to work).

Married With No Children

If you are married you will need some life insurance, especially if only one person is working and/or you own your own home.

In addition to this you will also need car, home, disability and health insurance.

Married With Children

If you have children then getting life insurance should be seen as a top priority so that your children are covered should something happen to you.

The best type of policy to have at this point would be one where you are required to pay a certain amount each year. Health insurance, car insurance, disability insurance and home insurance should also be taken out.

Since having children may increase the likelihood that your home or car becomes damaged, it is a good idea to re-evaluate your current policies to ensure that you are fully covered for damages caused by your children.

Married With Grown Children

Once you start to get older, insuring your health and life will start to become a top priority. Life insurance should ideally be set to cover funeral expenses and estate taxes, and these could be classified as debts after your death.

Your current health insurance policy should be re-evaluated based on your current level of health, and whether or not you feel your current policy adequately meets your current and future needs.

Any coverage policies that you took out when you were younger should also be re-evaluated, as pensioners often get discounted insurance rates.