What is Insurance

Introduction

Every time you buy something, there is a chance that something could happen to it. If you buy a DVD player, it could get damaged or destroyed by lightning. That creates a financial loss equal to what you spent for the item. The larger the item, the larger the financial loss, so when you start talking about buying a home, you’re talking big money! Also, when banks loan money to purchase expensive property (cars, homes, etc.), they have a financial interest in that property until the loan is paid off. If you have a $250,000 house, chances are you don’t have an extra $250,000 hanging around to replace it if something happens to it. That’s a huge financial risk. Insurance is simply a transfer of that financial risk from your wallet to the insurance company. You pay a relatively small amount of money (called the premium) in exchange for the transfer of the financial impact of a loss that’s covered by the policy. When a bank has a financial interest in your property because of a loan, one of the requirements may be the purchase of an insurance policy to protect the bank. Also, because you own certain types of property, you may be held responsible if someone gets hurt on or because of that property. Liability insurance protects you in case you’re sued by the person who gets hurt, by providing a lawyer to defend you and paying any judgments entered against you by the courts up to the limits you purchase in the policy.

So the reason you buy insurance is either because you want to make sure you’re protected if something happens, because the bank requires you to buy it in order to secure the loan, or both.