Buying Insurance

We hate to pay for it, but we're sometimes glad we did.

When we're young, we tend to think that nothing bad will ever happen to us. But sooner or later we usually find ourselves wanting the benefits that insurance offers.

How Insurance Works

Insurance is essentially a bet between you and your insurance company. You are betting that some type of accident will happen to you: illness or damage to your car or home. The company, on the other hand, is betting that you will not have such a problem. It bases its judgment on complicated formulas of probable risk.

Insurance Costs

In the event of an accident, you could suffer devastating financial losses. So you pay the insurance company a sum of money called a premium. The company then promises to pay compensation in the event of an accident. The amount the insurance company pays out could be many times what you paid in premiums.

If you remain accident-free, the company makes money. It uses part of that money to pay policy-holders who do sustain some type of loss.

Most insurance policies include a deductible, an amount of expenses that you must pay before the insurer will cover any expenses. For example, if your car insurance policy has a $1,000 deductible, and you have an accident, you'll have to pay the first $1,000 in damages yourself, then the insurance company will pay the rest, up to a certain limit.

Coverage

Before you buy auto or home insurance, find out if the policy covers replacement cost, the amount of money needed to buy a new item to replace the lost or damaged one. Some companies only cover actual cash value (ACV), the amount that the lost or damaged item would have been worth on the market before the accident. If, for instance, your two-year-old computer is stolen, its ACV is not nearly as much as it would cost you to buy a new computer to replace the stolen one, because computers lose their value quickly.

Table of Contents