Insurance at a glance
Insurance is a contract that transfers certain financial risks to an insurer in exchange for a premium. If a covered event occurs, the insurer may pay according to the policy's terms. The important details are not just the premium: coverage, exclusions, deductibles, limits and eligibility conditions all affect what protection a policy actually provides.
Types of insurance
Different insurance policies protect against different risks. The right type of coverage depends on your household, assets, income, responsibilities and the risks you want to transfer.
Health Insurance
Understand premiums, deductibles, copays, coinsurance, networks and out-of-pocket costs.
→Life Insurance
Learn how life insurance can provide a death benefit to beneficiaries and how term and permanent policies differ.
→Auto Insurance
Explore liability, collision, comprehensive and other common auto coverage.
→Homeowners Insurance
Learn about coverage for a home, personal property, liability and covered losses.
→Renters Insurance
Understand personal property, liability and additional living expense coverage for renters.
→Disability Insurance
Learn how disability coverage can replace part of your income when a qualifying disability prevents you from working.
→Long-Term Care Insurance
Explore coverage for qualifying extended care, including home care, assisted living and nursing facility care.
→Umbrella Insurance
Learn how umbrella liability coverage can provide additional protection above certain underlying policies.
How insurance works
Insurance works by pooling risk among policyholders. You pay a premium to an insurance company, and the company agrees to provide specified protection if a covered event occurs and the policy conditions are met.
A policy does not generally promise to cover every possible loss. Instead, it defines the events, property, people, services or liabilities that are covered and establishes limits and exclusions.
You choose coverage
You select a policy and coverage amounts based on the risks and financial interests you want to protect.
You pay the premium
The premium is the amount you pay to maintain the policy, subject to its terms and payment schedule.
A covered event occurs
If an event covered by the policy occurs, you can generally file a claim or use the covered benefit according to the policy.
The policy determines the payment
The insurer evaluates the claim under the policy's definitions, exclusions, deductible, limits and other conditions.
Insurance terms you should know
Understanding basic insurance terminology makes it easier to compare policies without focusing only on the monthly or annual premium.
Premium
The amount paid to maintain an insurance policy.
Deductible
An amount you generally pay toward a covered loss or expense before the insurer pays according to the policy.
Coverage limit
The maximum amount or extent of protection available under a policy for a covered loss or benefit.
Exclusion
A condition, event, property or circumstance that the policy does not cover.
Copay
A fixed amount that may apply to a covered healthcare service under a health plan.
Coinsurance
A percentage of covered costs that may be your responsibility after applicable requirements are met.
How to compare insurance policies
Comparing policies only by price can leave out some of the most important differences. Two policies with similar premiums can provide different levels of protection.
| Compare | Why it matters | Questions to ask |
|---|---|---|
| Coverage | Determines which risks or expenses the policy is designed to protect. | What exactly is covered? |
| Exclusions | Identify situations where the policy does not provide coverage. | What events or circumstances are excluded? |
| Limits | A claim may be subject to maximum amounts or other restrictions. | What is the maximum benefit or payment? |
| Deductible | Affects your out-of-pocket cost before insurance payments. | How much would I pay before coverage applies? |
| Premium | Determines the ongoing cost of keeping the policy. | What is the current premium and when can it change? |
| Eligibility | Some policies require specific conditions before benefits apply. | What must happen before I can use the coverage? |
How much insurance coverage do you need?
The appropriate amount of coverage depends on what you are trying to protect and the potential financial impact of a loss.
For example, a homeowner may consider the cost of rebuilding a home rather than simply its market value. Someone buying life insurance may consider income replacement, debts, childcare, education expenses and other financial obligations. A renter may focus on replacing personal belongings and protecting against liability.
Start with the financial loss
A useful starting point is to ask: “If this risk happened tomorrow, what financial loss would my household have difficulty paying for?”
Then compare that potential loss with your savings, other resources and the amount of insurance protection available.
When should you review your insurance?
Insurance needs can change as your finances and household circumstances change. A policy that fit several years ago may need to be reviewed after a significant life event.
- Buying or selling a home
- Getting married or divorced
- Having or adopting a child
- Changing jobs or income
- Starting or closing a business
- Buying a new vehicle
- Paying off major debt
- Accumulating substantial assets
- Approaching retirement
What determines insurance costs?
Insurance pricing varies by the type of policy and the insurer. Factors can include the amount of coverage, deductibles, location, insured risk, policy features, claims history and other underwriting factors.
Health, auto and life insurance can each use different pricing factors. State regulations also affect insurance markets and available products.
Because of those differences, there is no universal percentage of income or fixed dollar amount that represents an appropriate insurance budget for every household.
Common insurance mistakes
- Choosing a policy based only on price. A lower premium can come with different limits, deductibles or exclusions.
- Not reading exclusions. A policy's exclusions can be just as important as its list of covered risks.
- Underestimating replacement costs. Asset values and rebuilding or replacement expenses can change over time.
- Ignoring deductibles. A policy's premium does not tell you how much you may have to pay after a covered event.
- Failing to update beneficiaries. Life insurance beneficiaries should be reviewed when major family circumstances change.
- Not reviewing coverage after major purchases. New homes, vehicles, businesses and other assets can change your insurance needs.
- Assuming every loss is covered. Coverage depends on the policy's definitions, conditions, exclusions and limits.
Insurance FAQs
What is insurance?
Insurance is a contract designed to provide financial protection against specified risks in exchange for premiums. The policy defines what is covered, exclusions, limits, deductibles and other conditions.
What are the main types of insurance?
Common types include health, auto, homeowners, renters, life, disability, long-term care and umbrella insurance. Specialized insurance products exist for many other risks.
What is an insurance premium?
A premium is the amount paid to maintain an insurance policy. Depending on the policy, it may be paid monthly, quarterly, annually or according to another payment schedule.
What is an insurance deductible?
A deductible is an amount you generally pay toward a covered loss or expense before the insurer pays according to the policy terms.
Does insurance cover everything?
No. Insurance policies have definitions, exclusions, deductibles, limits and conditions. The policy documents determine what is covered.
How much insurance coverage do I need?
It depends on the risk, the financial loss you are trying to protect against, your assets and obligations, and the requirements of the applicable policy or law.
Should I compare insurance policies?
Comparing policies can help you understand differences in premiums, coverage, deductibles, exclusions, limits and other policy conditions before purchasing coverage.
Insurance resources
- National Association of Insurance Commissioners — consumer insurance resources.
- USA.gov — Insurance — federal consumer information about insurance.