By Cathy Pareto
Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium. (For background reading, see The History Of Insurance In America.)
Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. We say "significant" because if the potential loss is small, then it doesn't make sense to pay a premium to protect against the loss. After all, you would not pay a monthly premium to protect against a $50 loss because this would not be considered a financial hardship for most.
Insurance is appropriate when you want to protect against a significant monetary loss. Take life insurance as an example. If you are the primary breadwinner in your home, the loss of income that your family would experience as a result of our premature death is considered a significant loss and hardship that you should protect them against. It would be very difficult for your family to replace your income, so the monthly premiums ensure that if you die, your income will be replaced by the insured amount. The same principle applies to many other forms of insurance. If the potential loss will have a detrimental effect on the person or entity, insurance makes sense. (For more insight, see 15 Insurance Policies You Don't Need.)
Everyone that wants to protect themselves or someone else against financial hardship should consider insurance. This may include:
- Protecting family after one's death from loss of income
- Ensuring debt repayment after death
- Covering contingent liabilities
- Protecting against the death of a key employee or person in your business
- Buying out a partner or co-shareholder after his or her death
- Protecting your business from business interruption and loss of income
- Protecting yourself against unforeseeable health expenses
- Protecting your home against theft, fire, flood and other hazards
- Protecting yourself against lawsuits
- Protecting yourself in the event of disability
- Protecting your car against theft or losses incurred because of accidents
- And many more
Financial AdvisorLife insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
InsuranceWould your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
InsuranceWhat does it mean to insure your income? Here are a variety of ways to do it and some insights into when it might make sense to invest in income insurance.
InsuranceLearn how much - if any - insurance you really need.
InsuranceFind out how different types of coverages can protect you and which policy is right for you.
InsuranceLearn how to read one of the most important documents you own.
InsuranceMortgage protection life insurance sounds great in concept - a guarantee that your mortgage will be paid off if you die unexpectedly. But take a hard look at what you get before choosing it.
InsuranceInsurance policies come in a wide variety of shapes and sizes. Shop carefully and the right policies will go a long way towards helping you protect your assets.
InsuranceInsurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments.
InsuranceIf it's time for you to leave the nest, find out how to protect your new home from disaster.