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 What is Insurance? 

Insurance is one of those items that causes most people to run and hide. To many, insurance is a necessary evil and the details are hard to understand. You don't want to live with it, but you sure don't want to live without it. You can get insurance for just about anything: cars, homes, rentals, boats, personal property, jewelry, health, dental, even your life itself! There is almost nothing that some company won't insure.

What is insurance in its basic form? Insurance is defined as a contract which transfers the risk of a potential loss, from one entity to another, in exchange for a premium. Huh? Basically you pay someone else to take the risk. Let's take the example of home owners insurance. You would be devastated if you lost your home in a fire, so you buy home owners insurance and pay someone else to take the risk. Chances are that you never loose your home in a fire, as a result, you will likely never get your money back that you pay in insurance, BUT, if the worst does happen, you will get your home back. Insurance is peace of mind and allows the risk of catastrophe to be spread out among a pool thousands and millions of home owners.

Another way to think about it is that insurance allows a bunch of people to get together and help each other out. This is a bit idealistic, but it's sort of what insurance is supposed to do. For example, lets say you have a town of 100 homes. All the home owners agree to a contract to help each other rebuild their homes in case of disaster. Over the next 20 years three people lose their homes to fire or flood. The remaining 97 people get together and help the 3 rebuild their homes. Insurance is just a more regulated way of doing this. In this same example an insurance company would collect money from all 100 home owners. In return they agree to rebuild any home that gets destroyed. Any money that is extra is the profit for the insurance company. But, you ask, what happens if all 100 homes get destroyed or if none of them get destroyed. Well, clearly the insurance company would go broke in the first case and be rich in the second. The way this is typically avoided is by having large insurance companies that insure millions and millions of homes (or whatever they are insuring). Insurance companies run all sorts of complicated math and analysis (often by people trained in this called actuaries) to figure out what to charge and to assess the risks.

The government usually gets involved in regulating insurance companies to be sure they can pay claims and to insure that they actually pay claims rather than try to turn everything down. Getting a good quality insurance company is important. You want to be sure they can and will pay for your claim, if something happens.

In the end there are certain items that almost always make sense to insure. These are generally your car, house, and maybe your property if you rent. Certain valuables like high priced are or jewelry may make sense too. A good, trustworthy insurance agent should be able to help you assess what you should have insured and how much it will cost you in premiums. While it is not cheap and doesn't always seem worth it, insurance can buy peace of mind and can save you financially in the case of disaster.

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Principles of Insurance

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Please Note: THIS IS NOT PROFESSIONAL ADVICE. If you need specific advice please seek a professional who is licensed or knowledgeable in that area.  Please note that we are not insurance experts or lawyers. We accept no liabilty and claim no validity for the information on this site. Information on this site may not be accurate.  Insurance customers should always consult their insurance company and/or agent as well as their lawyer to get a good understanding of coverage and other legal questions/concerns about their insurance policy or any policy they intend to buy.

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