What is Insurance?

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.

Types of insurance

Insurance helps provide coverage for a wide variety of situations and events. 

The most common types of insurance include:

Health insurance: helps cover medical expenses and treatments, such as routine medical visits, injuries, or hospital stays

Dental insurance: often helps cover dental expenses, like regular cleanings and dental procedures

Vision insurance: typically covers routine eye exams, a portion of out-of-pocket eyewear expenses, and will occasionally contribute to procedures like LASIK

Legal insurance: provides access to a network of attorneys for legal help as well as digital self-help documents and resources

Life insurance: pays a set amount to a designated beneficiary when the policyholder dies

Accident insurance: pays out a lump sum in the instance of certain accidents

Disability insurance: provides a portion of income payments to a person who can no longer work due to pregnancy, mental health, injury, illness, or accident

Auto insurance: helps cover collisions, property or personal damage, and comprehensive or no-fault incidents (hitting a deer, storm damage, vandalism, etc.)

Homeowners insurance: helps cover damage to your home from natural disasters, accidents, and other risks associated with owning property

Critical illness insurance: helps provide financial assistance for certain illnesses

Hospital indemnity insurance: helps pay expenses related to hospital stays

Pet insurance: often covers veterinary costs for instances like an injury, illness, and routine vet care

Benefits of insurance

To summarize, here are some key benefits of having insurance:

Financial protection: Insurance helps protect you and your family against unforeseen events and losses that could result in high out-of-pocket expenses.

Risk mitigation: Insurance may reduce the financial burden of an unexpected expense.

Healthcare coverage: Health insurance helps cover the costs of a policyholder's medical expenses, including preventative care and treatments. 

Legal assistance: Certain types of insurance, such as legal insurance or liability coverage, offer access to legal services, representation, and advice.

Tax benefits: Depending on the insurance policy, you may be eligible to deduct insurance premiums, leading to lower taxable income and potential tax savings.

How to choose an insurance plan

When choosing an insurance plan, consider your needs and specific circumstances. Start by assessing the types of coverage you require and the level of coverage needed. Consider factors like your health, property value, dependents, and budget. Then, research and compare insurance providers, considering their plan options, costs, limits, and any additional benefits offered.

If you need extra guidance, consult with an insurance professional or agent. They can help you understand your options. If you’re enrolling in an insurance policy through your employer, you can reach out to your company's HR department.

How to get insurance

Depending on the type of insurance and the enrollment period, the process of getting insurance will vary. Here are some general guidelines to help you navigate the process:

Open enrollment: During the designated open enrollment period, you may be able to enroll in insurance offered through your employer or the government. Open enrollment dates for employer-sponsored plans are determined by the company and usually take place once a year. However, dates can change or vary by state or circumstance.

Special enrollment period (SEP): Certain qualifying life events (QLEs) may qualify you to enroll in insurance outside of the standard open enrollment period. QLEs can include marriage, divorce, having or adopting a child, a change in residence, or a job loss. When a QLE occurs, you’ll typically have a pre-determined time frame (e.g. 30-60 days) to make changes to your insurance coverage.

Year-round enrollment: Some types of insurance, such as auto, homeowners, and life insurance, can be obtained at any time during the year depending on the plan and insurance company. Contact the insurance provider directly for instructions on how to enroll.